June Summary. Business investment weighs on growth. 1Q15 GDP Growth. Components of GDP

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1 Mar 95 Jul 96 Nov 97 Mar 99 Jul 00 Nov 01 Mar 03 Jul 04 Nov 05 Mar 07 Jul 08 Nov 09 GDP Australian 1Q15: GDP: An Export XXX Story June 2015 June 2015 Summary Business investment weighs on growth GDP grew by 0.9% over the quarter in 1Q15. Net exports were the key driver of growth followed by household consumption. Growth in 1Q15 at 0.9% over the quarter is stronger than the 0.5% q-q recorded in 4Q14. Stronger growth was primarily held back by falling business investment and increasing imports. Business investment fell sharply in the quarter as the impact of the switch to mining production from mining construction continues. Information, media and telecommunications saw strong growth in 1Q15 consistent with recent trends in Sydney office market net absorption data. 1Q15 GDP Growth Economic growth has disappointed over the past few quarters, however, results for the first quarter of 2015 were more encouraging. GDP grew by 0.9% over the quarter or 2.3% yearon-year (y-y), above market expectations. This y-y figure still remains below the long term annual trend rate of just over 3% p.a. Figure 1: Gross Domestic Product Growth 6% 5% 4% 3% 2% 1% 0% -1% -2% Quarterly percentage change Annual percentage change Export volumes grew strongly over the quarter and despite strong import growth, net exports contributed 0.5 percentage points to growth in the quarter. Australia s terms of trade continued to decline in 1Q15, falling by 2.9% q-q following on from a 1.6% decrease in 4Q14. Whilst worsening terms of trade do not have a direct impact on real GDP growth, because exports are measured in volume, not value, terms, there are indirect effects. At their June meeting, the RBA Board chose to keep the policy cash rate on hold at 2.00% following a second 25 bps cut in May. Although GDP growth remains below trend, the improving picture is likely to re-inforce the view that the RBA has finished easing in this cycle. Components of GDP Table 1: 1Q15 GDP Summary (Seasonally adjusted) Component Q/Q % Change Y/Y % Change Contribution to growth (Q) % pts Household Consumption Dwelling Business Public Sector Consumption Public Sector Exports Imports Change in inventories n/a n/a 0.3 REAL GDP Q2015 GDP: An Export Storey, June 2015

2 Jul 10 Nov 10 Jul 11 Mar 12 Nov 12 Mar 13 Mar 14 Jul 14 Nov 14 Dwelling investment grew by a robust 4.7% over the quarter, equivalent to 9.2% over the year. Strong housing markets, particularly in New South Wales and Victoria, are helping to support the Australian economy. Nationally dwelling approvals increased by 16.3% over the year to April There are many positive signs in the economy that the consumer sector is starting to improve: wealth effects from increasing house prices, strong retail spending growth and a moderate decline in the household savings rate from recent high levels. However, growth in real household consumption spending remains moderate at 0.5% over the quarter, contributing 0.3 percentage points to growth. This is lower than the 0.8% growth recorded in 4Q14. Falling business investment remains a key risk for the Australian economy. Non-mining investment is still struggling to pick up where the mining sector has dropped off. Business investment declined by 3.2% in 1Q15 and by 6.1% over the year to March. The recent capital expenditure figures back up this picture with capital expenditure falling by 4.4% in 1Q15 the largest fall since September This is predominantly linked to falling investment in the mining sector. Expected business investment over 2015/16 has also fallen off considerably, highlighting the risk to the Australian economy as we transition from a mining to a services-led economy. Although Australian corporations are cashed up they are still not feeling confident enough to spend. It remains to be seen whether the recently announced Budget measures to help small businesses will encourage spending over the coming months. Figure 2: Capital Expenditure, rolling annual chain volumes 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 $ million Mining Non-Mining Net exports provided the largest contribution to growth in the quarter adding 0.5 percentage points. The change in inventories added 0.3 percentage points to growth in 1Q15. This was predominantly down to the wholesale and retail trade building up inventories whilst in mining and manufacturing the opposite occurred. Building up of stocks by wholesale and retailers can be viewed as a positive planned expansion in anticipation of stronger growth to come and this view would be reinforced by the recent strength in retail turnover growth. An alternative view would be that the build-up is unplanned as demand was not as strong as anticipated. Data over the next few months should confirm which view is correct. State Growth State final demand (SFD), which measures the domestic economy, was strongest in Australian Capital Territory (1.4%) and Victoria (1.3%) in 1Q15. In New South Wales, growth slowed to 0.5% over the quarter, whilst South Australia grew by 0.8%. The surprise growth of 2.1% for 4Q14 in Western Australia has been revised down to -0.1% and was followed by growth of -1.8% in 1Q15, highlighting the impact of the slowing resources sector. Queensland, another resource rich state, grew by 0.1% following -0.9% in 4Q15. Sector Growth The national account income measure of GDP estimates the output (Gross Value Added or GVA) of each industry. Conditions are less divergent this quarter suggesting relatively broad based growth in the economy. Out of the 19 industries only three industries recorded a decline. These were Administration and support services (-1.2%), Construction (-0.8%) and Arts and recreation services (-0.9%). Construction is the most significant decline as it is the third largest industry within Australia. The decline is linked to some large resource projects switching away from construction and towards production. The strongest growth was in Mining (3.5%) reflecting increased production following large scale investment. Information, media and telecommunication, a significant contributor to office space demand, also grew strongly (3.4%). Implications The 1Q15 national accounts continue to highlight the transition that Australia is currently undergoing away from the mining sector. There are some positive signs, although the weakness in business investment remains a major concern. The spread of growth across industries is a positive indicator that Australian growth is not dependent on just one sector. In fact the diverse 2 1Q2015 GDP: An Export Story, June 2015

3 Jul 10 Nov 10 Jul 11 Mar 12 Nov 12 Mar 13 Mar 14 Jul 14 Nov 14 profile of Australia s economy is not dissimilar to the US economy despite the popular view that mining is the only driver of growth. However, Australia s economy is small and fits into a wider global context. It is therefore exposed to external shocks beyond its control. Concerns remain about the growth slowdown in China and the ongoing fluctuations in commodity prices. Additionally, although the RBA has stated a weaker Australian dollar would be better for the economy the currency is still determined by market forces. Going forward, net exports are likely to remain a key source of growth due to several resource projects switching to production and export from development. The domestic economy is showing positive signs although further growth is needed. Business investment remains the key cause for concern. Retail Market There has been positive news for the retail market in recent weeks. The two rate cuts, in February and May, are welcome news for consumers. Additionally, there was a more positive reaction to the recent Federal Budget. The Westpac / Melbourne Institute Index of Consumer Sentiment jumped by 6.4% to following the Federal budget in May. There are also improving trends within the household sector. Household consumption grew by 2.6% over the year to March and the outlook is positive. It appears that consumers are now more willing to spend with retail turnover growth improving significantly over the last twelve months. In March, retail turnover grew by 3.2% y-y. However, this positive trend is not being felt equally across all states. In Western Australia and Queensland, states heavily impacted by the slowing resources sector, retail turnover is growing at much slower rates (0.0% and 1.2% respectively). In New South Wales the retail sector has been especially buoyant boosted by the booming housing market. Figure 3: Retail Turnover Growth (Volumes), Y-Y 10% 8% 6% 4% 2% 0% -2% -4% NSW VIC QLD SA WA AUS Unemployment has fluctuated over recent months and now rests at 6.2%. Although this is above the ten-year average (5.2%) there is no strong evidence to support an upward trend in the unemployment rate. Any increase in unemployment is a concern for the retail sector and states which are being affected by resource sector lay-offs may adversely impact the retail sector. Office Market Reflecting the diversity of economic growth across states, net absorption within the office market has recorded a similar trend. The cities which have a higher exposure to mining and related industries are recording rising vacancy whilst Sydney and Melbourne CBD markets have moved firmly into a recovery phase. The strong growth in the information, media and telecommunications output is mirrored within the Sydney office market where technology companies have formed a significant part of the demand for office space. Atlassian, an Australian software company, is an example of this demand taking up additional space in 1Q15. However, business confidence remains subdued despite the cuts in interest rates and an improving growth profile. It will be difficult for an economic recovery to become entrenched until companies become more optimistic and are prepared to start committing money that is currently sitting on their balance sheets. 3 1Q2015 GDP: An Export Story, June 2015

4 Aug 10 Jan 11 Jun 11 Apr 12 Sep 12 Feb 13 Dec 13 May 14 Oct 14 Figure 4: National Net Absorption 150,000 Sqm 100,000 50, ,000 precursor to a broader recovery in the overall economy. Overall the outlook for industrial space demand is for modest occupier demand growth as the economy moves into a recovery phase. For further information, please contact Carol Hodgson Director Strategic Research carol.hodgson@ap.jll.com -100, ,000 Source: JLL Australia s economy is still expected to pick up throughout the year as the transition away from resources investment occurs. Stronger growth in the Melbourne and Sydney CBD office markets back up this prognosis. However, 2015 is likely to be difficult for Queensland and Western Australia significantly limiting office demand in their capital cities. Industrial Market The significant pick up in import volumes over the quarter should have a positive impact on to the industrial sector. Although this is partially linked to a particularly weak quarter in 4Q14, higher volumes of imports suggest that there will be increased demand for logistics and warehousing space. Additionally, if the RBA succeeds in its aim of reducing the value of the AUD further, then the cost of domestically produced goods will become more price competitive on an international scale. This should help to boost the struggling domestic manufacturing sector. Improvements within the retail sector should also have positive flow on effects to the industrial market. Logistics, a key component of the industrial sector, should be a key beneficiary of increasing online retail sales and retailer demand. Wholesale trade and retail trade both recorded growth in 1Q15, 1.8% and 0.9% respectively, and these sectors should boost demand for space. In 1Q15, Wholesale and retail trade accounted for 41% of industrial take up nationally. The residential sector continues to demonstrate very robust growth and this has strong supply-chain linkages to the bulky goods, wholesale, transport and building materials sectors. Historically an upturn in residential construction has been a 4 1Q2015 GDP: An Export Story, June 2015

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