Australia | Mar 03 2010
By Rudi Filapek-Vandyck
Investors better ignore the knee-jerk response by some media to label today's release of Q4 GDP growth figures by the Australian Bureau of Statistics as “better-than-expected”. Yes, it is true the majority of economists was concentrated around the 0.6-0.7% GDP growth projections prior to this week, but as these figures were updated on Monday and Tuesday, a consensus was building around the 0.9% number.
That's exactly what the ABS release revealed today: the Australian economy grew by 0.9% compared with the final quarter of 2008 in the closing three months of 2009. The real good news came where most people tend to spend hardly any attention: in the revision of the growth figure for the third quarter. Q3 GDP growth was revised up to 0.3%, turning the 0.9% in Q4 effectively into a much better result than the headline figure suggests.
The yearly rate of growth thus jumped to 2.7% – the best result in almost two years, points out CommSec. Non-farm GDP expanded by 0.8% in the quarter.
Some people will continue to argue this apparent strength in Q4 was exaggerated by a marked acceleration in public demand and temporary taxation incentives for business investment. This is true.
But it is difficult to ignore the confidence displayed by the Reserve Bank of Australia yesterday, and by the fact that the Australian economy has now entered its 19th year of uninterrupted economic growth, despite the crises that have taken place over the past two years.
And let's face it: it doesn't look like this economic track record will be broken any time soon.
Economists at ANZ note it is likely the upswing in housing construction and the ongoing surge in public investment will be key growth engines for the Australian economy in 2010. That, plus an improving world environment and rising terms of trade will also be supportive. Add an uptrend in underlying business investment, such as the start-up of the $50bn Gorgon LNG project, and it is easy to see where the RBA's confidence stems from.
Economist at Commonwealth Bank have been quick to add an improving labour market should be a major supportive factor this year as well.
However, point out CommBank economists, the residential construction cycle is yet to turn up – new construction actually fell in Q4. Regardless, housing lending and building approvals data are signalling a big lift in residential construction activity in 2010 and most economists have put a recovery this year in their models.
CommBank does highlight the gap between the leading indicators and actual construction raises concerns about the availability of suitable labour and construction materials. “There are anecdotes, for example, that some of the lift in public construction activity has come at the expense of private residential construction”, they economists report.
They have already identified the next problem: inflation, while benign at the moment, will increasingly become a problem later this year and into 2011. This is because the economic cycle has turned at a point where there is limited slack in product and labour markets.
This is why CommBank is convinced the RBA will hike the cash rate to 5% by year end, and potentially further in 2011.
The cash rate was lifted to 4% yesterday.