Australian Q2 GDP growth 0.9%; led by households

Australia's National Accounts for the June quarter (Q2) showed the domestic economy grew by a faster than expected pace of 0.9%, with annual growth lifting to 3.4% — the strongest since Q3, 2012. Market expectations were for +0.7%q/q and +2.9%Y/Y. Growth in Q1 was also upwardly revised from +1.0%q/q and +3.1%Y/Y to +1.1%q/q and +3.2%Y/Y.

On a per capita basis, GDP growth was +0.5% in Q2 and +1.8%Y/Y, which highlights the impact of Australia's strong rate of population growth, estimated at +1.6%Y/Y.

The Reserve Bank of Australia had forecast output growth of 3%Y/Y to Q2, while it expects the economy to grow a little above that level in 2018 and 2019. Trend growth in Australia is around 2.75-3%Y/Y.

Growth in Q2 was led by household spending (+0.7%q/q, +3.0%Y/Y), which added 0.4ppt to the quarterly headline figure (+0.9%). The key theme, though, was that households continue to spend more and save less, with the household saving ratio declining to 1% — the lowest since 2007.

This is a factor of weak income growth. Nominal wages growth — as measured by the Compensation of Employees figure — was +0.7% in Q2, with annual growth a touch slower at +4.8%. This figure, however, also reflects the rise in employment growth over the past couple of years. After adjusting for price increases, real income growth has been near-flat over the past year. 

Across the other sectors of the economy, housing construction added to growth in Q2 and over the past year, but slowing approvals and cooling property market conditions point to this fading at some point over the coming quarters. 

Business investment was soft in the quarter, but the drag from the unwind in mining investment is almost complete, and with profits continuing to rise the non-mining sectors are anticipated to support the growth outlook. 

Investment in public infrastructure is also expected to continue to add to economic activity, with major transport-related projects underway in New South Wales and Victoria to accommodate strong population growth.  

Net exports added to growth in Q2 (+0.1ppt), as expected, and over the next couple of years, the RBA anticipates resources exports, particularly from the LNG sector, to bolster the nation's trade performance. 

While this was a stronger than expected result, the outlook for growth still faces the headwinds from persistently weak household income growth, while property prices have softened over recent months in line with tighter financing conditions.