From CBA:
Today’s figures confirm that the Australian economy finds itself with a unique set of circumstances that will continue to perplex policymakers and complicate the interest rate outlook.
GDP growth is running at an above trend pace and the unemployment rate has been declining. In isolation, two highly desirable outcomes. But wages growth is at its lowest level since the 1990s recession and consumer inflation has been falling. On the surface, these four outcomes occurring simultaneously is bizarre.
But a lot of the anomaly is explained by the negative terms‑of‑trade shock coupled with soft domestic demand growth and a historically high underemployment rate. The latter means that there is spare capacity in the labour market.
We expect further monetary policy easing and have pencilled in two more rate cuts that would take the cash rate to just 1¼%.
Partly right but one must add that the export boom is actually killing jobs given it is major projects in iron ore and especially LNG, like Gorgon, which took 9,000 people to build but only 400 people to run. As well, as the volumes flow the price of the underlying commodity collapses.
Westpac:
The Q1 national account have surprised to the high side, relative to market expectations and those of the RBA. This is largely due to a bounce in exports, evidence that the mining investment boom is paying dividends and the lower Australian dollar is boosting services, thereby fostering a rebalancing of the Australian economy.
In addition, the consumer picture, while not strong, is relative robust. However, investment remains a weak spot and the upswing in non-mining investment remains elusive. On prices and incomes, the terms of trade taking another leg down was a negative and disinflationary forces apparent in the Q1 CPI are also evident in the national accounts.
There is very little rebalancing in this GDP release. What domestic demand there is in the East is being flattened by the capex downdraft in the West and North. The biggest driver by a very long way remains mining and its ramp up of voluminous dirt shipments.
Capital Economics:
It would be wrong to focus solely on the weakness of domestic demand when some of the boost from net exports is here to stay (exporting the resources dug out of the ground is essentially the second phase of the mining boom that has further to run).
Even so, net exports won’t continue to support GDP growth by as much. Despite the weakening in recent weeks, the dollar is still at a level that means by the end of this year net exports will hardly be adding anything to GDP growth. At the same time, dwellings investment will soon add less to GDP growth and consumption growth could slow too if the housing market continues to weaken.
So although the strong start to the year means that we are revising up our GDP growth forecast for the year as a whole, from 2.3% to 2.7%, growth is still likely to slow during the year. As the RBA is more focused on inflation than growth, today’s data probably won’t prevent it from cutting interest rates to 1.5%, but not until the August meeting at the earliest.
Net exports growth is not “here to stay” but will keep adding for another 18 months as LNG projects and Roy Hill come on stream. After that I expect they’ll turn negative as volumes fall on a slowing China and the gluts.
The dollar does not affect this at all given it only impacts prices not volumes except to the extent that competitiveness changes and impacts market share.
At the end of it all we’ll have:
- increased mining productive capacity but lot’s of it sitting idle;
- income and GDP recoupled;
- an huge current account deficit funding the eastern economies’ import gluttony and still stuffed productivity, and
- a slow rebuild underway in non-mining tradables back-filling point three and requiring ZIRP to do it.
The circumstances are remarkable but not incomprehensible. Fade any dollar bounce.
