Australian Economy Still Remains Resilient

In the first three months of 2017, the Australian GDP grew 0.3 percent quarter on quarter, marking 103 consecutive periods without a recession, one of the longest streaks in the world. Yet, the economy may face some headwinds as wage growth is stagnant, the housing market is slowing and subdued prices of iron ore, coal and oil and slower growth in China may lower exports revenues.

The Australia economy expanded 0.3 percent on quarter in the first three months of 2017, well below 1.1 percent in the previous period but beating expectations of 0.2 percent. The lower growth was a result of adverse weather conditions which hurt exports of iron ore and coal. Also, dwelling investment fell 4.4 percent, the most since the second quarter of 2009. Still, household consumption remained resilient as spending on rents and utilities rose. Inventories also contributed positively to growth as mining inventories rose the most in five years. Year-on-year, the GDP expanded 1.7 percent, the lowest since the September quarter of 2009. The central bank still expects the economy to growth around 3 percent in the next couple of years amid an improving global economy, internal jobs market and rise in non-mining investment. 

Until recently, construction, which accounts for around 9 percent of the GDP, has been driving the growth. In the first quarter of 2017, the building activity slowed due to weather disruptions. Building permits increased 4.4 percent in April, following a 10.3 percent slump in March. The Construction PMI rose to 56.7 in May from 51.9 in April, pointing to the strongest growth in construction since September of 2014.

Consumer confidence has been falling in the last few months. It reached a 4 month low of 97.9 in May as majority of households expect finances to either worsen or stay the same and confidence in the housing market and the outlook for house prices worsened. Also, the household savings ratio declined to 4.7 percent in the first quarter of 2017, the lowest ratio since 2008, signalling some of the rise in consumption was due to savings.  
In addition, wages are growing very slowly. The wage price index increased 1.9 percent year over year in Q1, the smallest gain since at least 1998. The central bank expects the wages to remain weak for a while, thus restraining growth in household consumption. On the other hand, a minimum wage rise of AUD 0.59 an hour to AUD 18.29 an hour had already been approved. 

The inflation rate has been on an upward trend since the second quarter of 2016, mainly due to rising oil prices. It reached 2.1 percent in the first quarter of the year, the highest since the third quarter of 2014. The central bank last cut the key rate in July last year by 25bps to a record low of 1.5 percent. No changes in current policy stance are anticipated this year. 

Charles |
6/7/2017 5:32:06 PM