March June Summary. A sharp improvement in nominal growth. Components of GDP. 4Q16 GDP Growth

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1 GDP Australian 4Q16: GDP: A return XXX to growth June 2015 March 2017 Summary The economy returned decisively to growth in the final quarter of 2016, recording 1.1% growth q-q. This was boosted by household consumption, net exports and public sector investment. Business investment, an ongoing concern for the Australian economy, recorded positive growth for the first time since mid The forward looking NAB business survey improved towards the end of 2016 and this trend has continued into A sharp decline in the household savings ratio supported household consumption in 4Q16, growing by 0.9% over the quarter. Annual growth is still lagging behind the long term average as sluggish wage growth holds back spending. 4Q16 GDP Growth The economy returned to growth decisively in the final quarter of 2016 recording 1.1% growth over the quarter above market expectations of approximately 0.8%. This follows on from a surprise fall in growth in 3Q16. Figure 1: Gross Domestic Product Growth A sharp improvement in nominal growth Increased commodity prices are flowing through to a boost in national income. There are encouraging signs that higher commodity prices are filtering through to spending with expenditure on machinery and equipment up by 1.0% in 4Q16. Nominal GDP rose by 3.0% over the quarter; the strongest growth since 2Q10. Household consumption was one of the largest contributors to growth in 4Q16, aided by a sharp decline in the saving ratio. However, household spending is still lagging the long term annual average as sluggish wage growth and only moderate job growth has impacted consumers. Components of GDP Table 1: 4Q16 GDP Summary (Seasonally adjusted) Component Q/Q % growth Annual % growth Contribution to growth (Q) % pts Household Consumption Dwelling Investment Private Business Investment Public Sector Consumption Public Sector Investment Exports Imports Change in inventories na na -0.2 REAL GDP Net exports made a modest contribution to growth in 4Q16 as the relatively strong growth in exports was offset by increased import volumes. Export volumes rose by 2.2% over the quarter, but exports in nominal terms recorded even stronger growth of 11.8%. This reflects higher commodity prices as nominal growth reflects price growth whilst real measures the change in physical volumes. 1 4Q16 GDP: A return to growth, March 2017

2 Real net national disposable income grew by 2.9% in 4Q16, up from 0.9% in the previous quarter. This is a much stronger result than for GDP and predominantly reflects the rally in commodity prices which started mid-way through the third quarter. Australia s terms of trade jumped by 9.1% q-q following on from a 5.2% increase in 3Q16. Improving terms of trade do not have a direct impact on real GDP growth, as exports are measured in volume, not value terms, but there are indirect effects on incomes and spending. The RBA commodity price index increased 25.4% over 4Q16 with bulk commodities up by 44.9%. average of 0.8%. The Westpac / Melbourne Institute Index of Consumer Sentiment dipped below 100 in December with pessimists outweighing the optimists. The RBA maintained the policy cash rate at 1.50% in February and reiterated its neutral stance stating holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time. Figure 3: Consumer sector Business investment, an ongoing concern for the Australian economy, recorded positive growth (1.6% q-q) for the first time since mid Non-dwelling construction, which has been in decline since September 2013, posted a return to growth. The RBA now estimates that Australia is approximately 90% through the fall in mining investment. The forward looking NAB business survey improved towards the end of 2016 and this trend has continued into Business conditions and business confidence both jumped in January 2017 suggesting a recovery in domestic demand. Figure 2: Total private business investment Government investment contributed 0.3 percentage points (ppts) to growth in 4Q16 reflecting infrastructure spending in states such as New South Wales and Australian Capital Territory. Government spending was stable over the quarter. The change in inventories detracted 0.2 pps to growth in 4Q16. State Growth Dwelling investment increased by 1.2% in 4Q16 reversing the decline in 3Q16 reflecting poor weather conditions. There is still a strong pipeline of residential construction, particularly in New South Wales and Victoria, which suggests this should remain a driver of growth into However, dwelling approvals fell by 8.6% during 4Q16. A sharp decline in the household saving ratio supported household consumption in 4Q16, growing by 0.9% over the quarter. Annual growth is still lagging behind the long term average as sluggish wage growth holds back spending. The wage price index grew by a modest 0.5% in 4Q16, lagging the long term State Final Demand (SFD) growth, which measures the domestic economy at state level, highlighted a return to growth across all states. Victoria bounced back in 4Q16 with growth of 1.7% q-q following a decline in 3Q16. New South Wales recorded growth of 0.8% matching the long term average performance. Western Australia recorded its first quarter of positive growth since June 2015, although this remains the weakest performance of any state at 0.4% q-q. Queensland recorded its fourth consecutive quarter of positive growth, signalling that the effects from the slowdown in mining investment have now about filtered through the economy. South Australia recorded growth of 0.9%. 2 4Q2016 GDP: A return to growth, March 2017

3 Figure 3: State Final Demand Accommodation and food services (-2.0%) and Construction (-1.2%). Implications The 4Q16 national accounts show a robust return to growth for the Australian economy. There was an even stronger uptick in growth in nominal terms as improving terms of trade filtered through to higher corporate profits. Increased commodity prices are behind much of this. The outlook for commodity prices is uncertain. If prices start to decline again this would flow through to reduced income growth. However, LNG export volumes are likely to continue to grow as new mine capacity comes on line throughout the year. Sector Growth The national account income measure of GDP estimates the output (Gross Value Added or GVA) of each industry. For the second consecutive quarter the strongest growth was recorded in Agriculture (8.3%). However, this is only a relatively small sector in the economy. It is also volatile and this quarter it was boosted by increased production of grains, cotton and livestock. Figure 4: Top five performing sectors 4Q16, Q-Q % Despite fluctuations throughout the year, the AUD ended the year at a similar level to the start, circa 0.73USD. This is marginally below the long term average of 0.77USD, but significantly below parity with the USD which was achieved throughout This weaker AUD is helping to support tourism, education and domestic manufacturing. Business investment edged up in 4Q16 but remains a concern for the economy. Company profits, especially those in the resources sector, reported strong growth. This may signal that a return to spending is on the cards, particularly on repairs and maintenance, as cost cutting is no longer the sole focus of these companies. The household sector also continues to face its own challenges with subdued wage growth, high underemployment and a falling savings ratio. Retail Market The retail market is facing a few headwinds. The household savings ratio declined sharply in 4Q16 and this now leaves less of a spending buffer to help sustain retail spending. Wage growth remains subdued and, as yet, there are no indications that this will change in the short term. Although the RBA cash rate is at a historic low of 1.50% several banks have recently raised mortgage interest rates in response to increased funding costs. This will flow through to retail spending. Other services, which includes industries such as machinery and equipment repair and personal services, grew by 5.4% over the quarter. Other strong growth sectors include mining (3.4%), wholesale trade (3.0%) and professional services (2.4%). Of the 19 industries identified, five recorded a decline. The largest declines were in Administrative and support services (-2.5%), The labour market remains relatively healthy with an unemployment rate of 5.7%, marginally lower than the long term average of 5.8%. The rate of growth in employment slowed significantly in the second half of 2016 and the composition of job growth has changed. Part time employment grew by 4.3% over the year to January 2017 whereas the number of full time employees fell by 0.7%. However, the ANZ job advert series recorded growth of 7.1% over the year to January 2017, suggesting a positive outlook. 3 4Q2016 GDP: A return to growth, March 2017

4 Figure 5: Retail Turnover Growth (Volumes), Y-Y organisations associated with large infrastructure projects across Australia. Figure 6: National CBD net absorption Retail spending grew in real terms by a relatively soft 2.2% in the year to December, well below the 10 year average of 2.9%. Retail turnover growth has trended gradually downwards over the past year. Limited wage growth, combined with lower house price growth, may hold consumers back from further upticks in spending Office Market The multi-speed Australian CBD office markets, reflected in economic performance, remained a relevant theme in The Melbourne CBD recorded 188,700 sqm of net absorption in the highest rate since Perth is highly dependent on the resource sector and the improvement in iron ore prices has helped stabilise the Perth CBD office market. The more diverse office market of Brisbane has been in recovery mode for the past two years and recorded an eighth successive quarter of positive net absorption in 4Q16. Sub-lease availability is a very sensitive indicator of business confidence and Perth CBD sub-lease availability fell by almost 11,000 sqm to 5.1% of total stock over the second half of Sub-lease remains at elevated levels, but the recent trend highlights the downsizing of resources firms and their service providers has already predominantly occurred. Industrial Market Source: JLL Research Absorption of industrial floorspace in 2016 reflected economic activity and was concentrated in the eastern seaboard markets. Sydney and Melbourne performed above their long-term averages. By contrast, take-up in Adelaide and Perth underperformed whilst Brisbane s occupier activity was in line with its 10-year average. Sydney and Melbourne s stronger results were underpinned by a higher delivery of new industrial developments, and consequently, greater volumes of pre-lease activity. Figure 7: Gross industrial take-up Company profits have improved and this has historically flowed through to capital expenditure programs and precipitated the demand for project space. However, organisations have shown a preference to provide shareholders with higher dividends and remain reluctant to commit capital to investment projects. The Professional services sector is the largest occupier of office space across the major CBD office markets and its expansion is a positive for headcount growth and tenant demand. There has been an improvement in the enquiry from mid-tier legal firms and those Source: JLL Research 4 4Q2016 GDP: A return to growth, March 2017

5 Reflecting strong growth in the agriculture sector there has been a notable uplift in industrial absorption from Food Production based users. Since 2014, gross absorption from this cohort has climbed by an average of 173% per annum. growth from the export driven users in the forthcoming year and drive demand in markets like Adelaide and Brisbane. In the near term, steady levels of residential completions are expected to support demand from the bulky goods and construction related users. However, some headwinds may eventuate from a slowdown in residential construction activity. Dwelling approvals have been trending downward in the market since the latter part of The outlook for a weaker AUD should fuel exports and underscore healthy terms of trade. Thus, we expect to see further jll.com.au COPYRIGHT JONES LANG LASALLE All rights reserved. For further details or to unsubscribe, please joneslanglasalle.research@ap.jll.com. The items in this publication have been compiled from the various sources acknowledged. The information is from sources we deem reliable; however, no representation or warranty is made to the accuracy thereof. 5 4Q2016 GDP: A return to growth, March 2017