Horrible Q2 GDP preview

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From Westpac’s Q2 National Accounts preview:

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  • The Australian National Accounts, to be released on Wednesday September 3, will provide an estimate ofeconomic activity in the June quarter.
  • We expect the second quarter of 2014 to be a soft one for GDP, following a strong start to the year. Central to this profile is a lopsided performance by resource exports, with Q2 to see some payback for a burst in Q1.
  • GDP growth is forecast to be 0.4%qtr, 3.0%yr in Q2. This follows an outcome in Q1 of 1.1%qtr, 3.5%yr.
  • Net exports swing from a positive contribution of 1.4ppts to a 0.7ppts subtraction in the June quarter. Exports consolidated at a high level in Q2, following a 4.8% jump in Q1, when unseasonably benign weather conditions resulted in fewer disruptions to coal and iron ore production than normal for this time of year.
  • A catch-up in imports reinforces this net exports profile. Imports rose by a strong 3.7% in Q2, following a fall in excess of 5% over the previous five quarters. Of note, services, including overseas travel, rebounded strongly, with Easter falling in April rather than March.
  • Inventories (including farm) are expected to add +0.8ppts in Q2, after a –0.6ppts in Q1, with imports contributing to stock rebuilding. This 1.4ppts turnaround partially offsets a 2.1ppts deterioration in net exports.
  • Domestic demand growth printed at 0.3%qtr in Q1 and we expect a repeat of this in Q2. Flat public demand, as governments focus on budget repair, is a headwind. Also, business investment is trending lower as the mining investment boom transitions to the production phase.
  • However, household demand (i.e. consumption + dwelling activity) strengthened over the past year, with record low interest rates triggering a strong housing upswing. In Q1, household demand increased by 0.9%. Annual growth lifted to 3.2%, up from a low of 1.4% at the start of 2013. In Q2, we expect 0.6%qtr, 2.9%yr.
  • Importantly, we expect the recent mismatch between the retail sales survey and total consumer spending in the national accounts to continue in the June quarter, as discussed in more detail below.
  • We expect nominal GDP to contract in the June quarter, falling by 0.2%. This would be the first negative print since 2009, associated with the global recession. The terms of trade fell sharply, down an estimated 5%, on lower iron ore and coal prices. Total company profits are expected to fall by 4% or more in the quarter.
  • For the RBA, key considerations are the momentum of the economy heading into the September quarter and further progress in the transition of the economy towards strength in the non-mining sectors. On these fronts, recent evidence is encouraging, notably positive business surveys for July and the most recent ABS capex survey.

GDP is a craps shoot but I reckon Westpac is being a bit optimistic on consumption and inventories. We could easily print zilch on the headline number. Full report here.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.