G’day, forex mates! If you’re wondering how Australia’s overall economy has been faring lately, especially since Australia’s Q1 GDP report will be released next week and the RBA would be giving another rate decision and statement, also next week, then today’s economic snapshot is just for you.
Note: Like my other Economic Snapshots, there are nifty tables at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. The bullet points provided highlight the underlying details and trends that give the numbers their proper context, however.
- Australia’s Q4 2016 GDP printed a 1.1% quarter-on-quarter expansion, beating forecasts for a 0.7% increase.
- The rebound means that Australia avoided a technical recession after Q3’s disappointing 0.5% contraction.
- The 0.9% increase in household spending (+0.4% previous) was the main driver for the recovery, since it added 0.5% to GDP growth (+0.2% previous).
- Private business investment was also a driver, adding 0.2% to GDP growth (-0.1% previous).
- This marks the first increase in private business investment after nine consecutive quarters of declines.
- Government investment became a major driver again after being the main drag in Q3.
- Government investment increased by 7.7% (-7.8% previous), adding 0.3% to total GDP (-0.4% previous).
- The 34.2% surge in national defence investment, in turn, was the main driver for total government investment.
- Net trade was also a driver, adding 0.2% to total GDP, thanks to the 2.2% increase in exports.
- Trade was a dud back in Q3, since exports and imports cancelled each other out.
- Year-on-year, Australia’s economy grew by 2.4% in Q4.
- Also, Q3’s +1.8% annual growth, which was the slowest year-on-year expansion since 2009, was upgraded to +1.9%.
- The major driver for the faster year-on-year growth was net trade, since it added 1.5% to total GDP growth (+0.7% previous).
- Household spending was also a major driver, adding 1.5% to annual growth (+1.4% previous).
- Meanwhile, private business investment was less of a drag, subtracting only 0.8% from GDP growth (-1.4% previous).
- Australia’s seasonally-adjusted jobless rate dropped from 5.9% to 5.7% in April.
- This is the best reading since January 2017.
- Meanwhile, the labor force participation rate held steady at 64.8%, which is the shared best reading since July 2016.
- This means that the drop in the jobless rate was due to the number of unemployed blokes and sheilas falling from 751K to 732K.
- This further means that the drop in the jobless rate is a healthy one.
- In terms of job growth, the Australian economy generated a net increase of 37.4K jobs.
- This is a smaller increase compared to the 60.0K increase in March, though.
- Moreover, the net increase in jobs was due to the 48.96K increase in part-time employment, which was partially offset by the loss of 11.60K full-time jobs.
- This is the first decrease in full-time jobs after two straight months of solid increases.
- Still, the Australian economy has been generating jobs for seven months straight, which is something.
Inflation & Wage Growth
- Headline CPI rose by 0.5% quarter-on-quarter in Q1 2017, matching Q4 2016’s reading.
- Year-on-year, CPI advanced by 2.1%, accelerating from the previous quarter’s 1.5%.
- This is the best reading in 10 quarters and also marks the third consecutive quarter of improvements for the annual reading.
- Moroever, headline CPI is now within the lower bound of the RBA’s target range.
- For reference, the RBA’s target range for annual headline inflation is 2-3%.
- Meanwhile, the annual core reading rebounded from 1.6%, a low not seen since 1998, to 1.9%.
- This is the best reading in five quarters.
- On a quarter-on-quarter basis, 6 out of the 11 sub-components printed increased while the rest took hits.
- Year-on-year, only 3 of the 11 sub-components got hit.
- Interestingly enough, the biggest driver for quarter-on-quarter CPI was the 0.8% increase from the housing component, which added around 0.2% to CPI.
- And of the housing component, the 2.2% increase in the cost of utilities accounted for 0.11%, the 1.0% rise in the price of new dwellings accounted for about 0.09%, the 0.1% rise in rent added 0.01%, and the rest only had very minimal contribution.
- The soft rise in rent and higher cost of utilities was anticipated by the RBA, but the higher cost of dwellings was not.
- Moving on to wage growth, total hourly rates of pay (excluding bonuses) in both the private and public sector increased by 0.5% quarter-on-quarter during Q1 2017.
- This is a tick faster than the +0.4% reported in Q4 2016.
- Wage growth has been holding steady at or around +0.5% since Q2 2015 after trending lower from a peak of +1.0 back in Q1 2012.
- Year-on-year, the wage price index increased only by 1.9%, which is the same pace as in Q4 2016.
- This is the shared weakest year-on-year increase since comparable records began in Q3 1998.
- As for trends, wage growth has been steadily slowing since Q3 2012.
Business Conditions & Sentiment
- The National Australia Bank’s (NAB) business confidence index rebounded from 6 to 13 index points in April.
- This is the highest reading since 2010.
- Also, business sentiment has been positive since September 2013.
- As for NAB’s business conditions index, it climbed even higher from 12 to 14 index points.
- According to NAB, “employment conditions drove most of the improvement in the month, while profitability was steady. A drop in trading conditions (sales) was only partly offsetting and it remains the strongest component despite the moderation.”
- In addition, “Solid levels of business conditions have begun to look more uniform across industries, although transport and retail drove most of the improvement in the month of April.”
- NAB’s labour costs index, meanwhile, finally increased from 0.8% to 1.0%, which is a promising sign for wage growth.
- Moving on to the Australian Industry Group’s (AIG) performance of services index (PSI), the reading jumped from 51.7 to a three-month high of 53.0.
- This marks the second month of improving readings.
- The improvement was broad-based across sub-indices, with the sales sub-index rising by 1.2 points to 55.0 and the new orders sub-index climbing by 2.2 points to 54.5.
- Unfortunately, the employment sub-index fell by 3.1 points to 51.9.
- The reading is still above the 50.0 neutral level, though, so payrolls still increased, albeit at a weaker rate.
- Going to AIG’s performance of manufacturing index (PMI), it recovered to 59.2 after sliding to 57.5 previously.
- The new orders sub-index shed 1.1 points and dropped to 61.5.
- However, the production sub-index picked up the pace by jumping 3.1 points to 60.7.
- Exports also soared by 7.5 points to 58.6.
- As for business loans, that printed a 0.4% increase in April.
- Year-on-year, business loans only increased by 3.1%.
- This is the weakest year-on-year reading since May 2014, as well as marking the fourth straight month of ever poorer readings.
Consumer Spending & Credit
- Retail trade turnover in Australia fell by 0.1% month-on-month (seasonally-adjusted) in March.
- This is a softer fall compared to February’s -0.2%.
- Nevertheless, it still marks the second month of declines.
- Moreover,retail trade turnover for all of Q1 only increased by 0.27% quarter-on-quarter.
- In contrast retail trade turnover for Q4 printed a 1.07% increase, so consumer spending very likely took a hit in Q1.
- Looking at the details, 4 of the 6 major retail store types reported decreases in retail trade turnover.
- The biggest drag was the 0.5% fall in retail sales from food stores (+0.2% previous), followed by the 0.6% fall (-0.1% previous) in sales reported by cafes, restaurants, and & takeaway food services.
- Year-on-year retail trade turnover only increased by 2.5%.
- This is the weakest annual reading in 44 months.
- In addition, this marks the fifth month of worsening annual readings.
- As for personal loans, both the monthly and annual readings were in negative territory again in April.
- Personal credit, on both a monthly and yearly basis, has been falling since January 2016.
- On a monthly basis, personal credit fell by 0.1% in April, which is a bit softer than the 0.2% fall in March.
- Year-on-year, personal credit slumped by 1.5%, the same rate of decline as in March.
- This is the shared biggest year-on-year contraction since April 2012.
- After slumping by 10.3% in March, building approvals increased by 4.4% in April, thanks mainly to the 9.6% increase in approvals of private sector dwellings excluding houses.
- Housing loans to owner-occupiers continue to grow at a steady pace, printing another 0.5% month-on-month increase.
- Year-on-year, it slowed from +6.2% to +6.1%, which is the lowest reading since September 2015.
- As for housing loans to investors, they increased by another 0.6% month-on-month in April.
- On an annual basis, housing loans to investors grew by 7.3%, which is the highest reading since January 2016.
- Also, housing loans to investors have been steadily picking up the pace after bottoming out at an annual pace of 4.6% back in August 2016.
- This may mean that speculative pressure on the Australian housing market is still picking up, increasing the chance of a housing bubble.
- Trend wise, overall housing credit maintained the +6.5% reported in March.
- Total housing credit bottomed out at 6.3% back in November 2016 and looks like it has been slowly rising since then.
- As for AIG’s performance of construction index (PCI), it modestly improved from 51.2 to 51.9 in April.
- Overall construction activity fell, thanks to the drop in housing and commecial building construction being partially offset by the large increase in apartment building construction and engineering works.
- Australia seasonally-adjusted trade surplus narrowed to $3,107 million in March.
- Still, this marks the fifth consecutive month of surpluses.
- That’s in Aussie dollars, by the way.
- The smaller surplus was due to imports jumping by 4.6% after contracting by 4.7% previously.
- This was able to offset the 2.4% increase in exports (+0.1% previous).
- But on an upbeat note, total exports increased by 5.44% between Q4 2016 and Q1 2017.
- Imports did increase by 2.44%, though.
- Even so, the net surplus for all of Q1 is bigger than the surplus back in Q4, so trade was likely a driver in Q1.
Putting it all together
Things still look mixed for Q1 GDP growth since trade will almost certainly be a growth driver.
However, retail trade turnover for all of Q1 only increased by 0.27% quarter-on-quarter, which is much weaker compared to the 1.07% increase in Q4 2016.As such, consumer spending very likely took a hit in Q1 and will likely be a drag, at least on a quarter-on-quarter basis.
And as I noted in the breakdown for GDP, Australia avoided a technical recession, thanks in mainly to the recovery in consumer spending.
Moving on, the RBA expects the jobless rate to be around 5.75% by June 2017. And the goods news is that the jobless rate in April was already at 5.7%.
Also, Australia has been generating jobs for seven months straight, although there is no real consistency when it comes to the quality of jobs created.
Also, wage growth continues to weaken on a year-on-year basis, although NAB and AIG did point to a pick up in wage growth in April.
As for inflation, the annual reading of +2.1% in Q1 2017 happens to be the best reading in 10 quarters.
Moreover, CPI is already within the lower bound of the RBA’s 2-3% target range and has a good chance of beating the RBA’s forecast of 2.0% by June 2017. Furthermore, the core reading also sharply increased. In contrast, the RBA only expects a “gradual” rise.
Moving on to housing, the RBA has been noting that “Growth in housing credit continued to outpace growth in household incomes, suggesting that the risks associated with the housing market and household balance sheets had been rising.”
And that still appears to be the case.
Not only that, housing credit to investors has been rising and this can be very clearly seen in the year-on-year readings, which implies that speculation is likely helping drive construction activity, which is another risk factor for the potential housing bubble in Australia.