Australia: Economy Posts A Strong First Quarter

June 12th, 2014
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Investing Daily Article of the Week

by Ari Charney, Investing Daily

Australia’s gross domestic product (GDP) posted its strongest growth in two years during the first quarter, which suggests the economy’s long-awaited transition from its dependence on the resource sector could finally be underway.

Follow up:

According to the Australian Bureau of Statistics (ABS), GDP grew at a seasonally adjusted 1.1 percent sequentially during the first quarter and 3.5 percent year over year. The former number beat economists’ estimates by a substantial two-tenths of a percentage point, while the latter exceeded projections by three-tenths of a point.

Australia’s economy boasts an incredible run: The country’s GDP has now grown for 22 consecutive years.

The ABS reported that growth for the quarter was driven by a 1.4 percentage point contribution from net exports and a 0.3 percentage point contribution from final consumption expenditure. These performances were partially offset by a decline of six-tenths of a percentage point from changes in inventories.

Although the peak in mining investment is now past, the sector is expected to continue to be a major contributor to GDP growth through production and exports. During the first quarter, the mining industry contributed 0.9 percentage points to GDP growth.

The Reserve Bank of Australia (RBA) has kept short-term rates at a record low of 2.5 percent, with the hope that a period of stability at current levels will be sufficient to foster growth from the non-mining sectors.

Thus far, rate-sensitive sectors such as real estate have led the way, though some analysts fear the country’s housing market could be forming a bubble.

In the announcement following its latest decision on monetary policy, RBA Governor Glenn Stevens observed that in addition to the strong expansion in housing construction, there’s also been moderate growth in consumer demand.

Even so, he noted that though there are emerging signs of improvement in investment intentions in some non-mining sectors, these plans remain tentative, as cautious firms await more evidence of a rebounding economy.

In addition to the housing sector, the retail space has also exhibited strength over the past year. The ABS reported that retail turnover rose a seasonally adjusted 0.2 percent in April, following growth of 0.1 percent in March.

Although this result fell short of economists’ expectations by a tenth of a percentage point, it marked the twelfth consecutive month of growth in this space.

Department stores were the largest contributor to retail turnover, up 2.9 per cent, followed by food retailing (0.2 percent), cafes, restaurants and takeaway food services (0.5 percent) and clothing, footwear and personal accessory retailing (0.2 percent). These performances were partially offset by declines in household goods retailing, down 1.0 percent, and other retailing, which fell by 0.2 percent.

The drop in spending on household goods is somewhat surprising, given the strong real estate market. For instance, sales in the furniture and floor coverings segment decreased by a substantial 6 percent in April, following a period of sustained growth. However, economists believe this could simply be related to the timing of the Easter holiday.

Economists with Westpac recently detailed the three key steps necessary for Australia’s economy to continue its transition. The first involves growth from rate-sensitive sectors, which is already happening with housing, and the second involves an increase in consumer demand, for which retail numbers show evidence.

But the final step is trickier, especially given the risk-averse psychology currently prevalent among business owners, which the RBA mentioned in the remarks we cited earlier. Consumer demand must be strong enough to spur higher capacity utilization, and ultimately the rise in business investment (i.e., spending on machinery, equipment, and hiring) that precipitates all virtuous economic cycles.

Thus far, the so-called wealth effect from rising home values has yet to fully translate into increased spending, perhaps in part because of sluggish income growth and concern about the employment market. That’s resulted in a strong savings rate that sustained itself through the first quarter, as cautious households continued to set aside earnings. Westpac expects consumer spending to remain soft through at least mid-year.

Still, the consensus among economists surveyed by Bloomberg is for Australia’s economy to grow by 2.8 percent this year, or roughly four-tenths of a point better than last year. That’s also three-tenths of a point better than the forecast for the US. So the trend is headed in the right direction, even if growth is not especially robust yet.


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