From Westpac comes the following initial reactions to today’s March quarter GDP release, which it believes strengthens the case for further near term interest rate cuts:
Q1 growth printed a fraction below expectations at, 0.6%qtr, 2.5%yr.
We had expected growth of 0.7%qtr, 2.6%yr & the revised market median forecast was also 0.7% (downgraded from 0.8%).
The National Accounts confirmed a loss of momentum in the Australian economy during 2012 and into early 2013. This is evident both from the headline growth numbers and the detail.
Annual GDP growth moderated to 2.5% from 3.2% in Q4, as a 1.2% increase in Q1 2012 dropped out of the calculation. Quarterly GDP growth has been consistently sub-par over the last year, at: 0.6% Q2, 0.8% Q3, 0.6% Q4 and 0.6% Q1.
Domestic demand contracted by 0.3% in Q1, following insipid gains of 0.1% in Q3 and 0.2% in Q4. Annual domestic demand growth slowed to 1.1%, This is the weakest outcome since 2009, when the low point was -1.2%, and before that since June 2001. A decline in domestic demand early in 2013 reflected: disappointing consumer spending, 0.6%; flat dwelling activity; a sharp fall in business investment, -4.3%; and was despite a (temporary) strengthening of public demand.
Sub-trend economic growth has translated into softer labour market conditions. Hours worked did rise in Q1, up 0.5%, but rose by only 0.9% over the year. The high Australian dollar is eroding the competitiveness of trade exposed sectors, a significant negative for the economy. This is weighing on the labour market.
Consumer spending surprised to the low side, increasing by only 0.6% in the quarter. Annual growth is now 2.0%, the slowest rate since 2009 (when the low was -0.8%yr) and before than since 1993. We had expected a burst of spending in the quarter, in excess of 1.0%, given a spike in retail sales, +2.2%, as reported in the quarterly retail sales survey. The national accounts reported that spending on retail items increased by 1.6%qtr and spending on services advanced by 0.2%. Household wage incomes are under pressure from weak labour market conditions. Nominal wage incomes advanced by only 0.2%qtr, 2.7%yr in Q1. In addition, households are opting to hold savings at a high level. The household saving ratio inched higher to 10.6% in Q1, from 10.4% in Q1.
Business investment was cut early in 2013, declining by 4.3%. Annual growth slowed from 13% to 2%. Investment weakness early in 2013 was broadly based, as both mining and non-mining sectors reduced spending. By asset: non-residential building fell, -1.1%; infrastructure, -5.7%; equipment, -5.4% and intellectual property products, -1.3% (led lower by an 11% fall in exploration spending).
A positive, the upswing in new residential building activity, extended into a third quarter: +4.1% Q3, +3.9% Q4 and +2.2% Q1. However, early in 2013, this was offset by a further fall in renovation activity, down 3.4%. Total residential building activity was: flat qtr, +2.7%yr in Q1.
Public demand spending is weak, but volatile from quarter to quarter, as governments attempt to repair budget positions. Public investment managed a partial rebound in Q1, up 3.4%, following a 4.8% fall in Q4.
International conditions became a little more favourable in Q1, with the terms of trade ticking 2.6% higher, largely reversing a 2.9% fall in Q4, to be 14.7% below the peak of 2011 Q3.
Net exports made a sizeable contribution to growth, +1.0ppt qtr, +2.4ppts yr. This reflected import weakness, plus an uptrend in resource export volumes, an uptrend that will continue given expanding capacity.
Inventories subtracted 0.4ppts from Q1 growth and subtracted 0.9ppts off annual growth, consistent with a loss of momentum in domestic demand.
Considerations for monetary policy
The Reserve Bank conveyed an easing bias in its June statement, but it did not come across as an urgent one. The inference from the Governor’s wording was that the path of easing from here will depend on developments in demand; the financial markets (the $A, as it jointly impacts demand and inflation) and the inflation story itself. The most important piece of information on the latter front will come to hand between the July and August meetings, in the form of the Q2 CPI. Today’s national accounts figures will surely be an important input to their assessment of current demand conditions. As we detail above, demand is materially below trend, with domestic expenditure contracting. On that basis alone, demand is certainly in need of support. That reinforces our view that in the medium term the cash rate will have to fall further, ultimately reaching 2% by the end of Q1 2014. Given we also have a more downbeat view on global growth next year than the Bank, our confidence in the basic parameters of this position is high.The month to month meeting track is difficult to read at the best of times. In a protracted easing cycle, the difficulty is amplified. We already see a strong case for further monetary policy easing. Given the RBA’s explicit linking of “scope” to the inflation outlook, a cut at the next post CPI meeting – August – looks a good bet. Today’s data though argues that if one takes a broader definition of the “inflation outlook”, to encompass the lagged impact of developments in the output gap, which has widened materially on the back of three consecutive quarters of poor domestic demand, a respectable case can be made that the probability of a July move has increased. While market pricing for July is presently about 30%, it should perhaps be a little higher than that on the basis of today’s report. Major forthcoming risks events for the monetary policy outlook are next week’s jobs report (Thursday, for the month of May), and the minutes of the RBA’s latest meeting, scheduled for release on June 18.
