Australia | Sep 04 2007
By Greg Peel
Economists were expecting the second quarter GDP number to come out today with a 0.5% rise, and yesterdays inventory data had some wondering whether that forecast may be too high. But there was a good deal of shock around town when a 0.9% figure was posted.
This is the third consecutive above-average quarterly result, and has pushed the annual economic growth rate to a booming 4.3%. The last time growth exceeded 4% was in the fourth quarter 2004. And yet growth is still being impeded by drought difficulties in the farm sector, as non-farm GDP grew by a whopping 5.2%. This is the highest growth in the sector since 1994.
And it goes on. Domestic demand grew by 1.8%, taking the annual figure to 5.6%.
If it wasn’t for the current turmoil in global credit markets, and fears of a slowing US economy, you could have almost bet on another rate rise tomorrow. However, the RBA has now adopted the Bernanke approach, suggesting (how long did it take to figure this one out) that second quarter data are a bit too stale to be used as reliable indicators for what’s actually going on now. Hence the RBA will remain on hold for the time being. But at the first sign of stability, we’ll go up for sure.
A big driver in the numbers was public spending – up 3.1% – while private spending was up still a decent 1.5%. TD Securities suggests these numbers show considerable confidence in the Australian economy, given the long lead times of major investment projects. It’s all about increasing that lagging capacity. However, it’s still lagging, as the numbers suggest aggregate demand is still running ahead of supply.
Commonwealth Bank is heartened, however, that with investment spending running at an annualised 9.0% capital stock will grow at the fastest rate seen since the 1960s. Faster population growth and rising labour force participation are also boosting the supply of labour. Eventually there should be a reflection in a boost to productivity, and that would actually be anti-inflationary.
CommBank also believes we are on the brink of finally seeing a boost in export growth as well. The mining boom of the last five years should be enough to lift from a flat number to 6-7% per annum. That would add another 0.5% to GDP growth but contribute to an improvement in Australia’s trade accounts.
The call remains for a 25 basis point rise from the RBA in November, taking rates to 6.75%. We thus have two months to see just what fallout may transpire from the credit crunch.