As we move on into the spring, it is an opportune time to take stock and see where the Australian economy, and its housing market, are heading.
Yesterday we received the official economic growth data from the ABS, which while surprising on the high side, confirmed the medium-term outlook I pitched in August last year.
The smart money was punting on relatively uninspiring real growth of 0.9% in the second quarter, which was going to be driven by an inventory rebuild after the floods. Instead, we generated substantially greater 1.2% real GDP growth, which was notable for being surprisingly broad-based. This was even more impressive given the flood-induced contraction in the first quarter was revised down from -1.2% to -0.9%, which meant that the second quarter was starting off a higher base.
The details surrounding Australia’s economic growth engine were revealing. Net exports actually detracted 0.5 percentage points from the GDP result due to a slower-than-expected recovery in coal volumes. Had net exports been flat, the real GDP growth estimate would have been +1.7%, which is a little higher than the RBA’s priors. The good news is that coal exports should recover forcefully in the third quarter. The public sector also lopped off another 0.4 percentage points from growth as the government tries to eliminate its deficit before the next election.
A reader referred me to a statement I had made in August 2010. Specifically, I argued, “the economy is about to embark on a period of above-trend growth”. Naturally, I am no weather forecaster. So I will admit that I did not predict the savage Queensland floods, or the Japanese earthquake-cum-tsunami-cum-nuclear crisis.
Yet even in the face of these unanticipated events (and some extraordinary geopolitical turbulence in the Middle East and Europe), yesterday’s statistics tell us that real private final demand in Australia — that is, private consumption plus private investment — has been advancing at a well-above trend 5.4% annualised pace over the first six months of 2011 (see chart). There is no doubt that had Australia’s export market not been cruelled by the east coast floods in the first quarter of 2011, real GDP growth would have been strikingly strong.
Here HBSC’s chief economist, Paul Bloxham, comments: “Domestic demand is rock solid. That’s the key message from [yesterday’s] GDP release. Yes, the Queensland floods have disrupted coal exports, but the domestic economy has continued to grow strongly.”
Notwithstanding the many hysterical claims that consumer spending and the non-mining economy are weak or in recession, including from some of the RBA’s conflicted independent board members, the non-mining sector managed to expand by 1.2% in the June quarter. Even the reportedly death-spiral-bound manufacturing sector grew by a vigorous 2.8% over this period.
It also turns out that Australian consumers are spending money at very normal rates. Consumption increased by a strong 1% (real) in the June quarter, and has risen by a trend-like 3.2% over the past 12 months, which is its best rate in a year and accounted for almost half of all GDP growth. Importantly, there has been a shift in consumer spending away from goods towards services, which surged 2% in the quarter and are growing at an annual rate of 5.5% (the highest since 2008).
On this note, RBS’s highly regarded chief economist Kieran Davies argues: “This supports our view that the monthly retail sales numbers — which continue to exert a strong influence on financial markets — are no longer a good guide to overall consumer spending. It also makes us wonder about the link between consumer [confidence surveys] and spending, which our past research has shown is not a consistent predictor of consumption.”
In concert with healthy consumer activity, we saw the household savings rate fall from a recent high of 11.7% to 10.5% while real, net per capita disposable income increased by 2.9% over the June quarter to hit its highest level ever ($48,988 for every man, woman and child in Australia).
In summarising the GDP numbers, UBS chief economist Scott Haslem opined: “Today’s data reveals much more underlying strength in the economy in the second quarter than anticipated, with the likely temporary weakness in exports and the unwinding of public capex from the GFC stimulus masking a ‘private economy’ expanding above trend.”
As a final observation, we are seeing some de facto cuts in the fixed-rate home loan market caused by the inversion of the yield curve. It is now possible to get three-year fixed-rate loans for around 6.4%, which is substantially below the headline standard variable rate of over 7.5%. This is based on a more bearish economic outlook, which is being driven by both the offshore turbulence and conflicting domestic data, such as today’s unemployment survey. Only 600 net new jobs have been created in the last three months, which has forced the unemployment rate up to 5.3%. This will help the RBA do its inflation-fighting job and, at the margin, reduces the probability of future rate hikes.
*This article was first published at Property Observer