From Bloxo yesterday:
…reading the economy recently has also required an expert eye. This is because many of the indicators we typically look at have been affected by the weather, or measurement issues, or both.
Cyclone Debbie, which struck Queensland in late March, and unusually wet weather on the eastern seaboard, including the wettest March in Sydney since 1975, severely affected the economic indicators. Retail sales fell sharply in Queensland in March, but bounced back in April.
Housing construction fell in the first quarter, due to bad weather, as did coal exports in April, although they, too, bounced back in May. As a result, GDP growth was weak in the first quarter and the disruption is forecast to have affected the second quarter numbers too.
However, indicators which are better at abstracting from weather-related effects, such as surveyed business conditions, have been much more buoyant. The NAB survey showed that business conditions and capacity utilisation were around decade-highs in May.
…Despite the noisy indicators, our reading is that the underlying growth story remains intact. Mining investment, which had been declining for the past four years, has begun to stabilise.
Commodity prices have also held up at levels that are well above the early 2016 trough, supporting growth in national incomes.
In short, the end of the drag from the mining sector is expected to support a lift in overall growth and a gradual decline in the unemployment rate over the next 12 to 18 months.
We see GDP growth running at 3.3 per cent at the end of 2017, which is one of the highest forecasts in the consensus survey, and the unemployment rate falling to 5.4 per cent by then. This should drive a modest lift in wage growth in the second half of this year and for underlying inflation to gradually climb.
…Given strong growth forecasts, expect to see the Reserve Bank keeping its cash rate on hold this year – but also expect to see the need to lift it in early 2018.
If you’re going to discard all negative indicators then of course you’ll see growth ahead. However, a more objective assessment leaves one in no doubt that the following is going to hold sway:
- a renewed terms of trade shock;
- the car industry shuttering;
- continuing capex falls;
- a worsening gas shock;
- the dwelling construction bust;
- the house prices stall, and
- immigration flooding the labour market.
GDP is going to rebound strongly in H2 this year after the weather hits and as last year’s -0.4% September quarter drops out but that was never the issue. The above list is for 2018 when will see much more labour market weakness on the east coast, much more income ripped from the economy and much less impact from wealth effects to support consumption.
You can pick any number you like regarding growth next year, we’re not in the business of plucking numbers from the ether, but one thing is certain, domestic demand will be weak and the odds of RBA tightening are somewhere just above zero. Pretty much the only thing I can see that might change this is another wild round of Chinese stimulus which I do not expect.
The next move remains down.
