Australia | Sep 02 2009
By Chris Shaw
Australia’s second quarter GDP surprised to the upside this morning. FNArena has lined up some economist responses (see also “Australian GDP Comes In A Winner” published earlier today).
Commonwealth Bank chief economist Michael Blythe notes while the Q2 GDP number means growth for the year is just 1.0%, well below what the bank estimates is trend growth of around 3.25% and the lowest result since 1991/92, it is actually a much better result than was predicted in the May Budget when growth of 0% had been forecast.
The GDP outcome was driven by a policy-induced lift in consumer spending, house purchases, equipment capex and public spending, Blythe noting these were enough to offset weaker exports and lower private construction spending. Looking ahead he points out the weak global economy is crimping company profits, small business income and government revenues, meaning it is more an income recession in Australia than a broad based recession.
Positives to take out of the accounts, in Blythe’s view, include the fact real household incomes rose by 2.4% in the quarter, some of which was diverted towards strengthening household balance sheets. Labour demand indicators are also trending the right way, meaning there is now less risk of wide-scale job shedding.
ANZ Banking Group economist Riki Polygenis also points out the quarterly accounts show non-farm GDP expanded by 1.1% in the period, which she notes is the strongest outcome since the first quarter of 2007. Breaking down the figures also shows the composition of the economy’s growth appears to be shifting away from net exports and towards domestic demand, which is a favourable outcome given current global conditions.
The household balance sheet repair work touched on by Blythe was also a point of focus for Polygenis as she notes with households now in a more secure financial position, there is now greater capacity to sustain or build on higher spending levels.
On the back of today’s numbers Polygenis expects the Reserve Bank of Australia (RBA) and Treasury will be revising up their growth forecasts for the economy, which adds weight to the view the next move in interest rates will be up. But Blythe suggests while the RBA is likely to move sooner than expected, any increase in official rates is not imminent as growth remains at a sub-trend pace and much of the growth result can be attributed to the Government’s stimulus measures.
This means expectations in the market for rates to go up very soon are likely to prove wide of the mark, with Blythe forecasting the beginning of the tightening cycle to be sometime in the first quarter of 2010. The market is not as convinced, Westpac noting the reaction of the bond market post the release of the figures indicates the focus of traders remains on the near-term risks of the RBA hiking the cash rate.
On Friday, economists at National Australia Bank moved their expected first RBA rate rise forward to the October or November meeting – this side of Xmas thus.