Growth in Australia had strong momentum around the turn of the year. Q1 GDP increased by +1.1% in the quarter and +3.5% y-o-y, which is above trend growth for Australia. GDP was supported by very strong growth in resources exports to China, as new mining and export capacity came on-line. At the same time, there was a modest lift in household spending and residential investment rose sharply. The numbers provided evidence that growth is rebalancing away from being mining investment-led. GDP growth was strong despite the drag from falling mining investment.
But there has been some loss of momentum since the first quarter. New building approvals have fallen, growth in retail sales and housing price growth has slowed. Consumer sentiment has declined, reflecting the impact of Federal budget cuts on confidence. Trade data also suggest that the very strong growth in resources exports in Q1 is unlikely to be repeated in Q2. In addition, growth in incomes is being squeezed, as commodity prices fall without a matching decline in the AUD (the currency has actually appreciated). As a result, we expect GDP growth has slowed into the second quarter.
Nonetheless, the underlying trend improvement in the Australian economy is expected to continue in the second half, as monetary policy is still loose. Despite slower growth in housing prices they are still rising, reflecting the impact of low interest rates. Also, the slowdown into Q2 has not yet impacted on business confidence, with firms continuing to report plans to take on new employees. Forward looking business surveys suggest hiring intentions are still at higher levels than last year. We still expect the unemployment rate to edge lower through 2014.
With a trend improvement in the labour market still underway and housing prices still rising we expect the RBA is unlikely to deliver any further rate cuts. However, we now see them on hold for longer than we previously expected. We expect the cash rate to remain on hold for the rest of this year, with rates then expected to rise in Q1 2015.
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.
