The private sector is done for but all praise the gubmint, via Damien Boey at Credit Suisse:
We now have all the partials we can get to “now-cast” 1Q real GDP. Today we received trade and government spending data, which on balance surprised to the upside:
- Net exports were as expected, contributing 0.2% to quarterly GDP growth.
- Government spending contributed to growth, with consumption rising by 0.8%, and investment rising by 0.4%.
Tallying up the data, we now-cast 1Q real GDP growth of around 0.5%. If this materializes, year-ended growth will slow to 1.7% from 2.3%. Private domestic demand has been quite weak, with some offset from government spending, trade and re-stocking.
Looking ahead, it looks as if 2Q got off to a soft start. Retail sales fell by 0.1% in April, with household goods, café and apparel spending lending the declines. By state, NSW and VIC sales were quite weak, consistent with their profiles of housing market deterioration.
But as noted previously, after the LNP election victory in early May, it is likely that sentiment has improved, supporting activity growth, after a lull.
Longer-term, our proprietary financial conditions index (FCI), which takes into account the domestic price of money, the domestic availability of money, the international price of money, and household free cash flow, is suggesting that real GDP growth will bottom out in the next quarter or so. We are looking forward to recovery in growth to 2-2.5% by mid-2020. That said, even this upswing is not enough to achieve potential growth. Therefore, the risk is that the output gap will continue to widen, causing inflation to undershoot the RBA’s target for longer.
It is almost a given now that the RBA will cut rates in early June. The key question for bond market pricing is how much will the major banks actually pass on to end borrowers.