National Accounts - GDP A Game Changer?

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Wednesday, March 1 National Accounts - GDP A Game r? GDP growth was stronger than expected, rising by.% in the December quarter. Moreover, September s quarterly growth was revised upwards from.

1 Wednesday, March 1 National Accounts - GDP A Game r? GDP growth was stronger than expected, rising by.% in the December quarter. Moreover, September s quarterly growth was revised upwards from.9% to 1.1%. In the second half of 15, the economy grew by an average of.9% per quarter. This was the strongest two-quarter result since early 1. For the year to the December quarter, GDP rose to an above-trend pace of 3.%. This followed upwardly revised growth of.7% in the year to the September quarter. The significance of today s data is that the economy grew at a pace above trend over the second half of 15, whereas previous data had suggested that the economy was growing at a pace a bit below trend over this period. Economic growth in the December quarter was driven by household consumption, despite very low wages growth. The household savings ratio declined to its lowest in over seven years, as consumer spending growth outpaced soft growth in wages. States have well and truly switched roles within the multi-speed economy. Final demand was strongest in Victoria and NSW in the quarter followed by the ACT, Tasmania, and SA. The downturn in mining investment is continuing to affect final demand in Qld, WA and the NT. The economy is still facing challenges. However, with solid momentum behind growth in nonmining sectors of the economy, we remain comfortable with our view that the RBA will leave the cash rate on hold in 1. 9 % Real Gross Domestic Product 8 Household Consumption (chain volume measures, % pa) Annual % 3 Quarterly % Mar-9 Mar-95 Mar- Mar-5 Mar-1 Mar-15 1

2 GDP grew.% in the December quarter, above our own and consensus forecasts for a.% increase. Moreover, September s quarterly growth was revised upwards from.9% to 1.1%. For the second half of last year, GDP growth averaged.9% per quarter. This is the strongest twoquarter result since the March quarter 1. The annual pace of growth picked up from a revised.7% in the September quarter (previously reported as.5%) to 3.% in the year to the December quarter. This was the strongest since the March quarter 1. There were encouraging signs of underlying strength in today s data. Today s outcome was despite net exports making no contribution to growth, which had been a strong driver of growth in earlier quarters. It was also in spite of further weakness in business investment. Domestic economic growth (or domestic final demand) picked up in areas including consumer spending, public spending, public investment and dwelling investment. The relatively healthy outcome supports the view that non-mining sectors are recovering. Strong labour market growth in 15 appeared to be at odds with the sub-trend pace of economic growth. Today s data, showcasing stronger economic growth helps to reconcile with the solid pace of job creation in 15. GDP Expenditure Measure: The detail behind the numbers reveals more solid growth in the second half of last year. Household consumption rose.8% in the December quarter, after rising.9% in the September quarter. This was the highest two-quarter growth in household consumption since mid-1. Low interest rates are supporting consumption. Additionally, employment gains over the past year have improved job security for those employed and employment prospects for those looking for work. This has given households the impetus to spend, despite very low wages growth, with consumers increasingly dipping into their savings buffer. Dwelling investment, which has been another key driver of growth, rose.% in the December quarter, with low interest rates supporting the housing market. This was the strongest growth in three quarters. Recent residential building approval data, while still at an elevated level, has softened, suggesting the contribution of dwelling investment to economic growth will wane this year. Government expenditure supported economic growth in the quarter. Government investment rebounded, rising.% in the December quarter, after falling 8.3% in the September quarter. Government consumption spending lifted.7% in the December quarter. Exports have been a major driver behind the recent volatility in quarterly economic growth. After detracting 1. percentage points from growth in June quarter last year, net exports contributed 1.7 percentage points to growth in September quarter, only to make no contribution in the December quarter. Exports rose just.% in the December quarter, while imports also rose.% in the quarter. Despite all the positive growth news, it comes as little surprise that business investment remains weak as the economy continues to unwind from the mining investment boom. Business investment fell 3.3% in the December quarter, the ninth contraction in the past ten quarters. For the year to the December quarter, business investment fell 11.3%, the weakest annual result since

3 the December quarter. Domestic demand rose.% in the December quarter, an encouraging sign after it contracted.3% in the September quarter. For the year to the December quarter, domestic demand increased by 1.1%. Selected Expenditure Items on GDP, Chain Volume Measures Quarterly % Household Consumption.8 Public Consumption.7 Dwelling Investment. Business Investment -3.3 Public Investment. Contribution to GDP ppt Inventories. Net Exports..8 GDP Contributions to Growth (Dec quarter 15, percentage points) 8 Domestic Final Demand (Annual % ) Hhold Dwelling Consump. Inv Business Inv Public Spend. Inv Net Exports GDP Income Measure: Despite the broad strength in the headline growth rate, GDP growth based on incomes was subdued in the December quarter. Incomes (in nominal terms or unadjusted for inflation) grew just.%. Over the year, the income component of GDP grew just.%. This measure largely comprises wages and profits, which have been hit by soft wage growth and 3

4 falling commodity prices. - Gross Operating Surplus Profits (gross operating surplus) for private non-financial corporations fell 1.8% in the December quarter, largely reflecting the impact of falling commodity prices on mining profits. Profits for all sectors grew 1.1% in the quarter, while annual growth remained modest, at 1.%. A recent stabilising in commodity prices should help limit further declines in mining profits in the near-term especially given production capacity is continuing to increase. A lower Australian dollar will also provide support to company profits across all sectors. Nonetheless, the outlook for commodity prices remains a key uncertainty for corporate profits. - Wages Wages growth (including employer s social contributions) was rather disappointing in the December quarter, rising just.%. This was despite a pickup in job growth in towards the end of 15, although soft wage growth may have allowed greater flexibility for employers to hire more workers. On an annual basis, wage growth picked up in the December quarter, reflecting stronger growth over mid-15. Wages grew at an annual pace of.9%, which was the strongest in over a year, but still a soft pace of growth on a historical comparison. Household disposable income, which includes non-wage income, rose at a slower pace of just.1% in the December quarter. For the year to the December quarter, household disposable income rose 3.1%, down from growth of.% in the year to the September quarter. 15 Household Savings Ratio (quarterly data, per cent) 1 Terms of Trade (ratio of export to import prices) Mar-9 Mar-95 Mar- Mar-5 Mar-1 Mar-15 Mar-9 Mar-9 Mar- Mar-8 Mar-1 Mar- - Household Saving Ratio Stronger consumer spending combined with subdued wage growth indicates that growth in spending by households is outpacing growth in their incomes. Consequently, the household savings ratio fell from 8.7% in the September quarter to 7.% in the December quarter, the lowest in over seven years. Subdued income growth does limit prospects for a further pickup in household spending. Given

5 that spare capacity still exists within the labour market, wage growth is likely to remain subdued for a while longer. It remains questionable how long consumer spending will outpace their earnings growth. Nonetheless, it is encouraging that households are confident enough about the future to limit their savings in favour of household spending. Moreover, there remains scope for the household savings ratio to decline further given households have built healthy buffers over recent years. - Terms of Trade The terms of trade (ratio of export to import prices) fell a further 3.1% in the December quarter, the eighth consecutive quarterly decline. Over the year to the December quarter, the terms of trade has dropped 1.% and is now down 3.1% from its peak in the September quarter 11. It is just.3% above its long-run (-year) average. Industry Break Down: Industry Gross Value Added, Chain Volume Measures Quarterly % By Industry Sector Annual % Rental, hiring & real estate services Information media & telecommunications Arts & recreation services..9 Other services.. Electricity gas, water & waste services Public Admin & safety Wholesale Trade 1.. Agriculture, forestry & Fishing Mining Retail Trade Financial & insurance services.9 5. Healthcare.9. Education & training.. Construction Transport,postal & warehousing Administrative & support services Professional, scientific & technical services Accomodation & food services Manufacturing

6 State Final Demand: States have well and truly switched roles within the multi-speed economy. State final demand was the strongest in Victoria (1.%) and NSW (1.1%), where employment growth has been the most firm. There was a solid outcome for the ACT (1.%) in the December quarter, although this followed a contraction in the previous quarter. South Australia (.%) and Tasmania (.%) recorded modest growth in final demand. Meanwhile, the downturn in mining investment is continuing to affect State final demand in Queensland (.1%), Western Australia (-.3%) and the Northern Territory (-.3%). In the year to the December quarter, Victoria had the strongest annual growth in final demand (.%) followed by NSW (3.%). Final demand in both of the largest State economies grew at above their long-run averages. There was also relatively healthy growth in final demand in Tasmania (3.%) and the ACT (3.1%). Demand in South Australia continues to grow moderately (1.8%), continued to contract in Queensland (-1.7%), Western Australia (-.7%) and the Northern Territory (-17.%). 3. State Final Demand (annual % change, Q 15) State Final Demand (quarterly % change, Q 15) NSW VIC QLD SA WA TAS ACT Aus - NSW VIC QLD SA WA TAS ACT Aus Outlook Economic growth was stronger than expected in the second half of 15. There are encouraging signs in the detail in today s data, with domestic demand growing despite a flat result for net exports and continued weakness in business investment. This goes some way to allaying concerns about the economy s transition to growth driving by sectors other than mining investment, with consumer spending showing a pickup in recent quarters. Despite our expectations for further weakness in mining investment and the absence of a pickup in non-mining investment, low interest rates and the low Australian dollar are providing support to growth. The economy is still facing challenges. However, with solid momentum behind growth in non-mining sectors of the economy, we remain comfortable with our view that the RBA will leave the cash rate on hold in 1. St.George Economics Ph ()

7 Contact Listing Chief Economist Senior Economist Senior Economist Hans Kunnen Josephine Horton Janu Chan () () () The information contained in this report ( the Information ) is provided for, and is only to be used by, persons in Australia. The information may not comply with the laws of another jurisdiction. The Information is general in nature and does not take into account the particular investment objectives or financial situation of any potential reader. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the Information without first seeking expert financial advice. For persons with whom St.George has a contract to supply Information, the supply of the Information is made under that contract and St.George s agreed terms of supply apply. St.George does not represent or guarantee that the Information is accurate or free from errors or omissions and St.George disclaims any duty of care in relation to the Information and liability for any reliance on investment decisions made using the Information. The Information is subject to change. Terms, conditions and any fees apply to St.George products and details are available. St.George or its officers, agents or employees (including persons involved in preparation of the Information) may have financial interests in the markets discussed in the Information. St.George owns copyright in the information unless otherwise indicated. The Information should not be reproduced, distributed, linked or transmitted without the written consent of St.George. Any unauthorised use or dissemination is prohibited. Neither St.George Bank - A Division of Westpac Banking Corporation ABN AFSL 3371 ACL 3371, nor any of Westpac's subsidiaries or affiliates shall be liable for the message if altered, changed or falsified. 7

National Accounts - GDP Beauty is Only Skin Deep

Wednesday, 3 rd June 215 National Accounts - GDP Beauty is Only Skin Deep GDP expanded by.9% in the March quarter, above consensus expectations. While this outcome appears solid, the detail suggests a