Australia: Will the pick-up in growth momentum continue? - NAB

Analysts at NAB note that the Australian economy picked up pace in Q2, with real GDP expanding by 0.8% qoq. 

Key Quotes

“While partly a retracement from poor (weather-affected) growth of 0.3% qoq in the first quarter, there were also some positive signals on government investment, business investment and consumer spending, while stronger LNG exports and a bounceback in iron ore exports helped to offset the impact of Cyclone Debbie on coal exports.”

“The year-ended pace of growth continued to be weighed down by the contraction in growth in Q3 last year, and Q1’s weak outcome, unchanged at 1.8% yoy%. Looking forward, year-ended growth is expected to pick up to above 3% in the second half, as LNG exports add further to growth, before easing back a little through 2018.”

“Outlook and Implications: there are certainly some positive signs in the data, including for business investment and government investment. This fits with the RBA’s upbeat view on the economic outlook, is consistent with the next move in rates being up rather than down, and raises the risk that the RBA may hike sooner than we currently expect in 2019. We do retain a degree of caution however - particularly when the outlook for key pillars of growth such as wages and consumer spending are clouded amidst structural changes in the labour market and high household debt levels, the exchange rate has risen, and there is a risk that the dwelling construction cycle may be peaking earlier than expected. In this environment, the inflation targeting central bank will need to be more confident that wages and underlying inflation will pick up in a sustainable fashion. Any emerging risks in the housing market are likely to be addressed through other (non-interest rate) channels, at least for now.”  

“Highlights

• On the expenditure side, consumption and underlying public final demand made the biggest contributions to growth, followed closely by net exports (bolstered by a recovery in coal exports and a pick-up in LNG). Meanwhile, dwelling and underlying business investment made little-to-no contribution, while inventories subtracted.
• By industry, growth continued in yearly terms across services sectors in particular such as professional services, IT, health and financial and insurance services, and is particularly strong in agriculture. Growth is contracting in construction (mining-related), manufacturing (despite a 1.8% rise this quarter) and arts & recreation services. Growth is now expanding in 15 out of 19 industry sectors, appearing reasonably broad-based.
• By state, state final demand expanded more than 1% in the quarter in SA, Victoria, Tasmania, Queensland and NSW, while WA, the NT and the ACT contracted. Of the mainland states, Victoria is currently growing fastest in year-ended terms (4.7% y/y), followed by SA, while SFD growth remains negative in WA.”