Australia: Mixed messages from Q4 GDP - ANZ

Felicity Emmett, Senior Economist at ANZ, comments that after the shock 0.5% q/q drop in Q3, Australian GDP bounced a strong 1.1% in Q4 and as they expected much of the weakness in Q3 was temporary and growth bounced broadly across the economy.

Key Quotes

“GDP bounced by a strong 1.1% q/q in Q4 to bring annual growth up to 2.4% from an upwardly revised 1.9% in Q3 (previously 1.8%). This was stronger than market forecasts, and stronger than the RBA’s forecasts of around 0.8% q/q.”

“Today’s report suggests that there was a broad improvement in momentum in the economy in late 2016. Consumer spending bounced, housing grew solidly, non-mining investment picked up, and public spending rebounded. Export volumes turned around, turning the net exports contribution positive. The better tone to the activity data is consistent with the improvement in business conditions and the employment data and has continued into early 2017.”

“Is this strength sustainable? While there are a number of positives in terms of the outlook, including for business investment and the external accounts, the question remains as to whether growth in consumer spending can continue to outpace household income growth. Wages are the largest component of household income and the overall wages bill fell 0.5% in the quarter, while overall household income grew just 0.2% (compared with 1.2% growth in nominal consumer spending). Moreover, high and rising household debt in an environment of persistently low wages growth is likely to eventually crimp consumer spending in our view.”

“While growth was stronger across the board, the inflation indicators in today’s report were particularly weak. The household consumption deflator rose just 0.3% and is up only 0.9% over the past year. More importantly, the GDP measure of wages fell 1.0% q/q and is 0.1% lower than a year ago. This weakness drove unit labour costs down 1.4% in the quarter to be down 0.4% over the year.”

“For policy, while the RBA will be pleased with the confirmation that the Q3 drop in activity was temporary, the weakness in wages and the implications for the inflation outlook are concerning. Nominal unit labour costs are a key input into the RBA’s underlying inflation models, and the persistent weakness points to an ongoing absence of domestic costs pressures. In aggregate, we think the rate hikes are a very low way off and the RBA seems set to keep rates on hold for the foreseeable future.”