Aussie GDP Beats Forecasts But Hides Deeper Risk

Australian GDP(y/y) has surged, coming in at 4.3%, beating market forecasts of 4.1% and catching traders and economists, by surprise. However, the Australian economy faces additional headwinds as domestic demand stalls and incomes remain under tight pressure.

The surprise growth in Australian GDP represented more a rebuilding of inventory stocks as well as a slight increase in net exports. Net Exports increased by 0.5% during the March quarter and Inventories added approximately 0.3%. These increases helped to raise GDP, above estimates to 4.3%, but a flat domestic economy still signals problems ahead.

In contrast, Australian domestic demand stalled in the March quarter, causing annual domestic demand growth to fall to 0.8%. The economy continues to be effected by the lower global commodity prices, and lacklustre demand from China, which has flowed through to domestic demand and consumption.

In practical terms, Australian households are likely seeing little growth in their incomes, whilst facing the prospect of a toughening job market. Australian wage growth remains exceeding weak rising just 0.1%, nominally, in the March quarter. There is also a significant level of spare capacity within the labour market which is likely to put further pressure on income levels. Although consumer spending remains somewhat robust, the expectations of a softening economy and tough labour marker will inevitably flow through to the consumer consumption data in the next quarter.

In fact, Western Australia may be in the initial grips of a significant downturn with the state facing an economic contraction of 1.8% in the March Quarter. Although not technically a recession, it likely feels like one to the people who rely strongly upon the mining sector for their livelihoods. Subsequently the flow on effects of reduced confidence and consumption throughout the non-mining sector has been stark.

Business investment also continues to decline and seems to confirm the deflation of mining activity within the economy. Business investment has been reported at -3.5% in the March quarter and reflects the lower total equipment investment, which also fell by 2.6%. This in turn has also affected public demand, which has weakened by 0.6%, and poses an additional headwind to the economy. Government tax revenues have also been disappointing placing further pressure on the Australian budget.

Overall, the Australia economy is going to face some significant head winds in the later part of the year. It is highly likely that the RBA will undertake a looser monetary policy and that further rate cuts in the latter part of year are a strong possibility. A future rate cut is fairly evident considering the raft of elected figures, along with the RBA, suggesting that the Aussie Dollar still remains over-valued. Expect to see worsening macro-economic figures next quarter, along with an Australian Dollar languishing within the doldrums of the 0.7100 range.