In review: Australian Q1 GDP growth slows to 1.8%

Momentum in the Australian economy continued to ease in 2019 following a sharp slowdown over the second half of 2018. The key dynamics include further weakness in household consumption due to persistently slow income growth, negative wealth impacts from falling property prices and tight credit conditions, a downturn in the residential construction cycle and subdued business investment. Slower global growth prompted by continuing trade tensions is the key headwind from abroad. 

In seasonally adjusted terms, real GDP growth increased by 0.4% in Q1, which was slightly below the median forecast for +0.5%, while the annual pace came in as expected at 1.8% -- its lowest in 9½ years -- after slowing from an upwardly revised rate of 2.4% for the year to Q4. Output growth has slowed to around 1ppt below Australia's trend or potential pace of around 2.75%. 

The Reserve Bank of Australia forecasts annual GDP growth to ease to 1.7% by mid-2019 before picking up over the second half to 2.6% by year's end. The RBA Board lowered the official cash rate by 25 basis points to 1.25% at its June meeting, with financial markets pricing in around another 40 basis points of easing by end 2019. 

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GDP — Q1 | Expenditure: GDP (E) +0.2%q/q, +2.1%Y/Y

Household consumption (+0.3%q/q, +1.8%Y/Y) — Growth in household consumption slowed further in the first quarter of 2019 as the annual pace softened from 2.0% to a near 6-year low at 1.8%.  The 4-quarter growth profile was 0.8% (Q2 '18), 0.3% (Q3 '18), 0.4% (Q4 '18) and 0.3% (Q1 '19) indicating that the softness set in over the second half of last year and continued into 2019. (click charts to expand)

Weakness in discretionary spending intensified falling by 0.1% in Q1 easing annual growth to 1.0% from 1.2%. In particular, that was weighed by retail spending on clothing and footwear (-0.6%q/q), furnishings and household equipment (-0.4%q/q), recreation (-0.5%q/q) and cafes and restaurants (-0.4%). In contrast, non-discretionary spending increased by 0.5% over Q1, though annual growth eased to 2.3% from 2.5%. In Q1, that included rises in utilities (1.7%), health (0.7%), rents (0.6%) and education (0.3%).   

The weakness in discretionary spending is driven by persistently slow income growth. Real growth in household disposable income lifted by 0.5% in Q1 and followed a 0.6% gain in Q4. Though subdued, these outcomes are an improvement on recent quarters. As a result, base effects saw annual growth in disposable income lift from 0.4% to 0.8%. The household saving ratio increased for the second consecutive quarter, rising by 0.2ppt to 2.8%. Given weak income growth and the negative wealth impact from falling property prices, households have cut back on discretionary spending, in turn resulting in a slight lift in saving.

Dwelling investment (-2.5%q/q, -3.1%Y/Y) — The residential construction cycle began to turn down in Q3 2018, with further weakness occurring in 2019 as activity contracted by 2.5% in the quarter. The annual pace has swung from +3.5% in Q4 to -3.1% in Q1. Both new building (-1.8%q/q, -3.1%Y/Y) and alterations (-3.8%q/q, -3.0%Y/Y) are firmly in decline. With dwelling approvals deteriorating for much of the past year, residential construction activity can be expected to remain a drag on output.     

   

Business investment (+0.5%q/q, -1.3%Y/Y) — Underlying business investment lifted modestly in Q1 but is softer through the year. The detail for the quarter was mixed; non-dwelling construction rising by 1.3% (building +4.5% and engineering -1.5%), intellectual property up by 1.0%, while equipment investment fell by 0.3%. The declines from engineering and equipment likely reflect residual weakness from the resources sector as major projects near completion. The recent ABS Capital Expenditure survey pointed to investment from both the non-mining and mining sectors lifting in 2019/20 and adding to economic activity.    

Public demand (+0.8%q/q, +5.5%Y/Y) — Activity continues to be supported by a strong public sector. Consumption spending is driven by the rollout of the NDIS and other initiatives relating to health and aged care services. Meanwhile, investment is firmly on the rise driven by an elevated pipeline of infrastructure projects.    

Net exports  (+0.2ppt in Q4, +0.5ppt yr) — Net trade added 0.2ppt to growth in Q1, which reversed subtraction in Q4 of 0.2ppt. Export volumes lifted by 1.0% in the quarter after improving from a 0.5% decline in Q4, with growth over the year subdued at 1.7% in response to supply disruptions in the resources sector. Import volumes contracted by 0.1% in Q1 and by 0.5% over the year in line with soft domestic demand. Meanwhile, inventories were a surprise drag in Q1 (-0.1ppt) but were flat through the year. 

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GDP — Q1 | Incomes: GDP (I) +0.5%q/q, +1.5%Y/Y

Q1's estimate of real GDP income growth was 0.5%, in line with the production estimate and stronger than the expenditure outcome (+0.2%). The annual pace softened to 1.5% from 1.8% driven by a base effect. 

Australian nominal GDP growth posted a 1.4% rise in Q1 -- the strongest outcome in a year --however, a base effect saw the annual pace ease from 5.5% to 4.9%. At its current 4.9% pace, national income growth has risen by 1.1ppts above its recent low from Q4 2017 (3.8%). Rising commodity prices are a strong tailwind, with the nation's terms of trade rising by another 3.1% in March quarter following a 3.0% lift in Q4. Growth through the year has swung to +6.1% compared to a 3.1% drag from a year earlier. 

This has had a direct flow through to the corporate sector and notably so for mining companies. Private sector company profits (excluding financial corporations) increased by 3.9% in Q1 after a 3.7% lift in Q4. In year-on-year terms, profit growth moderated from 11.5% to 11.0% but has accelerated from a 2.8% pace in Q1 2018. Profitability in the financial sector continues to grow at a more modest but still solid rate, rising by 1.9% in the quarter to 7.2% through the year.

The Compensation of Employees measure (including wages and salaries) saw a 1.2% elevation over Q1, which firmed annual growth from 4.1% to 4.3%, though that is well down from the recent peak of 5.1% from a year earlier. The increase in Q1 can be explained by a strong lift in hours worked, which the Bureau reported increased by 1.0% over the quarter that drove an acceleration in the annual pace from 1.6% to 2.8%. 

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GDP — Q1 | Production: GDP (P) +0.5%q/q, +1.8%Y/Y

The production estimate for GDP was 0.5% in Q1 matching with the income estimate and above the expenditure outcome (+0.2%). The annual pace slowed further from 2.2% to 1.8% to its lowest since Q4 2009.   

Four industries dragged on output in Q1; agriculture (-0.2%), construction (-0.9%), accommodation and food services (-0.2%) and real estate services (-0.4%). The impact of drought conditions has severely impacted output in the agriculture sector over the past year. Construction output has also contracted noticeably across the year following three consecutive quarterly declines due to the residential cycle turning down. 

At the other end of the scale, the health sector remains well clear at the top of the ladder driven by public spending associated with the NDIS and aged care initiatives, while consumer demand remains robust. Separate ABS data shows that employment growth continues in the sector, though now at a more moderate rate after a sharp run-up in 2017 and 2018. The chart, below, shows the industry-by-industry breakdown.

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GDP — Q1 | Prices

As measured by the GDP deflator, economy-wide inflation posted a 1% rise in Q1 to match the outcome from Q4. The annual pace was little changed at 3.0% from 3.1%, though sharply higher than a year earlier at 0.7%. The predominant factor here is the rise in the terms of trade. Abstracting for that impact, the Gross National Expenditure deflator shows that pricing pressures continue to be subdued at just 0.3% in the quarter and 1.6% over the year.

The headline Consumer Price Index (CPI) stalled in Q1 (0.0%) with the annual pace slowing sharply from 1.8% to 1.3%. The closest proxy in the National Accounts is the Household Consumption Deflator, which showed a 0.3% lift in Q1 while annual growth saw a more modest slowing compared to the CPI, easing from 1.7% to 1.5%. The Household Consumption Deflator is based on dynamic consumer spending rather than the fixed basket methodology in the CPI. 

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GDP — Q1 | Productivity

National productivity growth fell away to an 8-year low in Q1. Growth in total hours worked at 1.1% in the quarter vastly exceeded output growth of 0.4%, which resulted in real GDP per hour worked falling by 0.5%, sending the annual pace to -1.0% from +0.8%. GDP per hour worked in the market sector (excludes the public sector) fell for the third consecutive quarter contracting by -0.4%, as the annual pace turned negative at -0.9% from +0.7%. Real GDP growth on a per capita basis fell by 0.03% in Q1 -- its third straight quarterly contraction -- with the annual pace sliding from 0.7% to 0.1% marking its lowest since Q2 2013.

On the costs front, nominal non-farm unit labour costs were flat in Q1, though the annual pace lifted from 1.2% to 1.6% reflecting a base effect as the outcome from Q1 2018 (-0.4%) fell out of the calculation. Costs remain well down from the recent peak of 2.4% in year-on-year terms to Q4 2017. Adjusting for inflation, real non-farm units labour costs continue to fall with a sizeable 1.1% decline Q1 to be 1.7% lower through the year, however that was an improvement on the 2.3% deterioration for the year to Q4. With labour costs in real terms continuing to slide, this will constrain the nation's inflationary pulse and indicates that excess capacity in the labour market remains elevated.  

    

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GDP — Q1 | States

Demand in New South Wales lifted by 0.4% in Q1 recovering from a 0.1% contraction in Q4, though growth in annual terms continues to ease and is now 2.1% -- its slowest in 6½ years. Conditions in the household sector are subdued with consumption growth sliding to an annual pace of 1.8% from 2.5% a year ago, which is a response not only to low income growth but also to sharp declines in property prices. The state is noticing the impact of the rollover in the residential construction cycle with activity across building and alterations down by a combined 7.8% through the year. In offset, business investment is solid at 4.6% over the year bolstered by non-residential construction. There is also considerable support from public demand.   

In Victoria, demand increased by a modest 0.2% in the quarter slowing the annual pace from 5.4% to 3.0% -- a 5½-year low. Household consumption growth slowed further to 2.6% in annual terms to be down by a full percentage point from Q1 2018. Similar dynamics are in play as in New South Wales around wealth effects from falling property prices, though to a lesser extent so far. This is evident in residential construction activity, which while weakening at a sharp rate is still modestly higher over the year at 0.9%. Business investment was robust rising by 6.0% over the year driven by non-residential construction and equipment spending. Public demand remains solid and will continue to drive activity in the state given its strong pipeline of projects.

Looking at the other states, demand in Queensland remains contained at 0.5% in Q1 and 1.4% for the year. A weak household sector is evident, while business investment continues to fall. Public investment has been lifting providing some offset. In South Australia, demand contracted by 0.2% in the quarter slowing the annual pace to 1.8% -- its softest in nearly 3 years. This reflects slowing household consumption and declining residential construction activity. It was another tough quarter in Western Australia with demand falling by 0.3% taking annual growth to -1.4%, albeit rising from -1.9%. The state is under pressure from declining business investment, mostly from the mining sector but also from weakness in residential construction. Tasmania posted the strongest lift in demand of all states in Q1 at 0.7%, though the annual pace moderated to 5.0% from 6.5%. The household sector was weak in the quarter (-0.3%), but that was overcome by strength from business investment and public demand.    

Australia's trade surplus $4.9bn in April

Australia's monthly trade surplus was little changed in April coming in a touch below both the consensus figure and the record high from February. In yesterday's National Accounts, net exports added 0.2ppt to GDP growth in Q1 that printed at 0.4% and 1.8% in year-on-year terms. 

International Trade — April | By the numbers

• The trade surplus eased by $16m in April to $A4.871bn, slightly short of the consensus forecast for $5.0bn. March's trade surplus was revised down from $4.949bn to $4.887bn.  
• Export earnings incresed by 2.5% in the month (+$968m) to $A40.425bn accelerating growth through the year to 17.2%. (prior rev: -1.6%m/m, +12.1%Y/Y) 
• Import expenditure lifted by 2.8% in April (+985m) to $A35.554bn to be up by 5.4% on a year earlier (prior rev: -1.4%m/m, +1.4%Y/Y)

International Trade — April | The details 

Earnings from goods and services exported incresed by a robust 2.5% in April, which equated to a nominal rise of $968m in $AUD terms. The underlying detail showed that this was led by non-rural goods (+2.7%, $691m), which was driven almost exclusively by iron ore exports surging by 16% (or $1.375bn) in nominal terms. ABS estimates indicated that prices for iron ore lifted by 3% for lump and by 5% for fines in April, while volumes surged by 17% and 21% respectively. Elsewhere, the volatile non-monetary gold jumped by 19.5% or by $272m in the month and services were up by 0.8% or $65m driven by overseas tourism. Rural goods declined by 1.6% or $67m. 

Turning to imports, spending lifted by 2.8% or $985m in April on broad-based increases. Intermediate goods led the way rising by 3.9% or $423m, which included a $119m rise from fuel reflecting higher global oil prices. Capital goods increased by 4.9% or $308m, reversing a 5.3% fall in March, centered on industrial equipment. Consumption goods also lifted by 3.5% ($298m) to overturn last month's 3.2% fall and was led by textiles, clothing and footwear and vehicles. Services imports were essentially flat over the month.           

International Trade — April | Insights 

A robust start to the quarter with the trade surplus in April at $4.871bn just off the record high from February but a touch above the Q1 average of $4.8bn. This is driven by very high iron ore prices, while export volumes also lifted sharply in April. Resources exports are expected to add notably to economic activity in 2019.   

Australian Q1 GDP growth 0.4%q/q, 1.8%Y/Y; slowest since 2009

The Australian economy eased further in 2019 after slowing sharply over the second half last year. Real GDP growth (seasonally adjusted) was 0.4% in the March quarter, slightly missing the median forecast for +0.5%, though above the 0.2% pace in Q4. Output growth through the year slowed to 1.8% (as expected) -- its slowest since Q3 2009 -- from an upwardly revised pace of 2.4%, and is now roughly 1 full percentage point below Australia's trend (or potential) rate of around 2.75%. 

The Reserve Bank of Australia forecasts GDP growth of 1.7% in year-ended terms by the first half but then expects it to pick up to 2.6% by end-2019. Financial markets are pricing in around 1.5 additional rate cuts in 2019 following yesterday's decision by the Board to ease.

The domestic economy lost more momentum since the turn of the year, with the key dynamics being a weakening consumer driven by persistently slow income growth, deteriorating residential construction activity in response to property price declines and sluggish business investment, though the outlook is improving. National income is boosted by strength in commodity export prices with the terms of trade up by 3.1% in the quarter.

Household consumption growth was 0.3% in Q1 following a 0.4% rise in Q4. The annual pace eased from 2.0% to 1.8% -- its lowest since Q2 2013. Real growth in household disposable income remains very soft at 0.8% through the year, though it did at least rise from 0.4% in Q4. Consumer prices as measured by the household consumption deflator lifted by 0.3% in the quarter, but the annual pace slowed to 1.5% from 1.7%. The household saving ratio lifted by 0.2ppt to a still low level of 2.8% and follows a 0.1ppt rise in Q1. There are signs that households are looking to build up saving by spending less. Consumption growth on discretionary items fell further to be around 1% higher through the year -- taking it back to the pace from around 2 years ago -- while growth in consumption growth of essential goods and services was little changed 2.3% year-on-year. 

Residential construction activity declined by a further 2.5% in Q1 after a fall of 2.9% in Q4. The level of activity through the year has now swung to -3.1% from +3.5% as of the December quarter. Both construction (-1.8%q/q, -3.1%Y/Y) and alterations (-3.8%q/q, -3.0%Y/Y) are dragging and are expected to continue to do so over 2019.

Business investment was sluggish in Q1 with a rise of 0.5% on mixed detail with non-residential construction up by 1.3%, while equipment spending declined by 0.3%. The recent capital expenditure survey for 2019/20 pointed to both non-mining and mining sector investment rising, though those are early estimates and were reported during the lead up to the recent federal election. 

Public demand remains a growth driver, though in Q1 it was driven by consumption spending relating to the NDIS and health care initiatives. Investment should pick up again given the volume of infrastructure projects in the pipeline. 

Net exports contributed to growth in the quarter (+0.2ppt) reversing the drag from Q4. Export volumes lifted by 1.0% in Q1, while imports declined by -0.1%. Increased productive capacity in the resources sector and rising demand for services from Asia are expected to add notably to growth in 2019.   

The result from inventories was a surprise subtraction (-0.1ppt) where it had been expected to add to modestly to growth in the quarter.  

Link to our full review here 

Preview: GDP Q1

Australia's National Accounts for the March quarter are due to be released by the ABS today at 11:30am (AEST). The National Accounts are headlined by the GDP growth figures and provide the broadest range of indicators measuring activity in the domestic economy.

Year 2018 was one of two halves for the Australian economy; output growth was running at a strong 4% annualised pace through the first half, before slowing sharply to an annualised 1% pace for the second half. This reflected a weakening in the global economy, prompted by a slowdown in China and reduced international trade volumes due to geopolitical tensions, while domestically the key factors were a softening household sector constrained by persistently slow income growth, declining net wealth due to the housing market correction and high debt levels, and by a turn in the residential construction cycle brought on by a deterioration in dwelling approvals with supply now closer in alignment with pent-up demand, tight lending conditions, and falling property prices.   


As it stands | GDP

GDP growth in the December quarter was 0.2% and 2.3% through the year; these outcomes were lower than expected at 0.3% for the quarter and 2.5% on a year-ended basis and slower than in Q3 at 0.3% and 2.7% year-on-year. At an annual pace of 2.3%, output growth can be characterised as having fallen well below Australia's trend or potential rate (around 2.75%).     

Output growth in Q4 and over the year was led by public demand from both consumption spending relating to the NDIS, health initiatives and on aged care services, and from ongoing investment in infrastructure as governments at the federal and state level respond to strong population growth. 

The household sector was weak in Q4 and overall soft in 2018. Growth in consumption spending slowed to just a 2.0% pace through the year. Expectations for continued slow growth in income weighed on discretionary spending, while weak housing market conditions suppressed demand for household related items such as furniture and appliances.    

Business investment stalled last quarter and was a net drag on output through the year. Investment in the mining sector unwound further reflecting the nearing completion of major LNG projects, though investment lifted in aggregate across the non-mining sector supported by construction and equipment spending. The residential construction cycle peaked in Q2 2018 and began to rollover over during the second half, including a 0.2ppt subtraction in Q4.   

The external sector was a modest drag in Q4, though net trade added notably to growth in 2018 reflecting the increased productive capacity in the resources sector and strengthening demand for tourism and education services, particularly from Asia.  

Market expectations | GDP

In today's release, we can expect to see that GDP growth has slowed further since the turn of the year. The median forecast compiled by Bloomberg looks for growth of 0.4% in the quarter, with the annual pace easing to 1.8%. In comparison, the Reserve Bank of Australia (RBA) is forecasting GDP growth to slow to 1.7% for the year to Q2. 

The forecast for slower growth in Q1 is driven by the weakness in the partial indicators, including a contraction in retail spending, residential construction activity slowing further and a decline in business investment. Activity is supported by inventories (see here), public demand and net exports (see here) and likely by spending on household services.             


What to watch | GDP

Key in today's National Accounts is the household sector, which accounts for around 60% of the domestic economy. Household consumption growth is likely to have eased further in 2019 from its already soft 2.0% annual pace as retail spending, most notably in the discretionary categories, declined in response to ongoing slow wages growth and property price falls. 

Spending on household services (such as health, education and utilities) and other essentials (food and housing) make up around 70% of household consumption and is likely to remain reasonably firm. With consumption growth slowing closer towards income growth, the saving ratio is likely to be little changed through the quarter around its very low level, though these components have also been subject to significant revision over recent quarters.

Another important development over Q1 was surging commodity prices, particularly in iron ore -- the nation's largest export. As a guide, the RBA's Index of Commodity Prices lifted by around 5-6% in Q1, though bulk commodities -- including iron ore and coal -- increased by significantly more in the order of around 8-10%. As a result, expect to see the Terms of Trade (ratio of export prices to import prices) post a solid gain of around 3% in the quarter, which will deliver a boost to national income and bolster the federal government's tax intake providing scope for additional fiscal policy measures.  

RBA cuts the cash rate by 25bps to 1.25%

The Reserve Bank of Australia (RBA) Board cut the official cash rate by 25 basis points on Tuesday to a new low of 1.25%. The move was unanimously anticipated by both markets and economists ending a run of 30 consecutive 'on hold' decisions dating back to August 2, 2016. It was also the first time that the cash rate has been changed since Governor Lowe commenced his tenure in September 2016.  

   

Consistent with what the Governor had signaled during a speech two weeks ago, today's decision statement outlined that the cash rate was lowered in order to "support employment growth and provide greater confidence that inflation will be consistent with the medium-term target".

While the assessment on the labour market remained reasonably constructive, the Governor noted that the unemployment rate had lifted from around 5.0% to 5.2% in April, with the implication that "there has been little further inroads into the spare capacity in the labour market of late". While wages growth has been lifting, the progress has been gradual and the overall pace "remains low". 

On inflation, it is clear that the data from Q1 surprised significantly to the downside and was indicative that pricing pressures were broadly subdued. However, the Bank's forecasts for underlying inflation of 1.75% in 2019 and 2.0% in 2020 look to remain in place. 

Governor Lowe reiterated these themes during a speech on Tuesday night. Though employment was strong it is not sufficiently running down excess capacity, while inflation was likely to remain subdued due to a combination of forces including; slow wages growth, intense competition in the retail sector, soft housing market conditions and the introduction of measures by governments to ameliorate cost of living concerns.

In this situation, the Board concludes that the most effective way to lift inflation back towards the 2-3% target and to prevent expectations from drifting lower is to strengthen the labour market -- it now assesses full employment to be reached at an unemployment rate of around 4.5% compared to its previous and long-held estimate of around 5%. Recall that the Bank has a mandate to target inflation between 2-3% and to maintain full employment. As noted in the decision statement, today's rate cut "will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target". However, Governor Lowe again on Tuesday night pointed out the limitations of monetary policy on its own and called for fiscal stimulus, in particular through infrastructure investment, and structural policies to rev up business activity and drive increased investment and expansion. 

There are two main risks identified by the Governor that are present through its course of action; firstly, an uncertain outlook for household consumption due to ongoing low growth in incomes and the property market correction; and secondly, trade tensions that could negatively impact global growth. 

For the future direction of policy, it can be anticipated that the Board will get at least one further 25 basis point cut away this year, as its growth and inflation forecasts in the May quarterly statement were predicated on market pricing that pointed to the cash rate falling to 1.0% by end 2019. On Tuesday night, Governor Lowe confirmed that the Board was not on a pre-set path, but that "it is not unreasonable to expect a lower cash rate". Developments in the labour market remain the top priority for the RBA.   

Australian retail spending declines in April

Australian retail turnover declined in April in a weak start to Q2 from the household sector. Sales volumes (turnover adjusted for price changes) fell by 0.1% in the March quarter.   

Retail Sales — April | By the numbers

• Retail turnover fell by 0.1% in April to $A27.328bn; a clear miss on the expected outcome for a 0.2% rise. Turnover growth in March was unrevised at 0.3%.

• Annual turnover growth slowed to 2.8% from 3.5% in the previous month. 

Retail Sales — April| The details

The detail across the categories showed broad-based weakness in April. Turnover in food lifted by 0.2% and by 4.2% over the year. If that category is removed, turnover growth fell by -0.2% in the month to be just 1.9% higher for the year. Surprisingly, spending in department stores increased by 1.8% in April (+2.7%Y/Y), while 'other' retail (sporting goods, pharmaceuticals and newspapers etc) lifted by 0.8% (+3.9%Y/Y). However, the other discretionary areas declined; household goods -0.9% (-1.6%Y/Y), clothing and footwear -1.2% (+4.0%Y/Y) and cafes and takeaway food -0.7% (+2.7%Y/Y). 

Looking across the states, turnover declined by 0.4% in both New South Wales and Victoria in April. Combined, those two states account for nearly 60% of national retail spending. Through the year growth has slowed to just 1.2% in New South Wales, but is stronger in Victoria at 3.7%. For the other states, Queensland lifted by 0.7% (+6.0%Y/Y), South Australia by 0.6% (+3.1%Y/Y), Western Australia by 0.1% (+0.5%Y/Y) and by 0.3% in Tasmania (+2.6%Y/Y).

Retail Sales — April| Insights 

This was a weak update to start Q2 for the household sector, though it is possibly overstated by public holidays for Easter and ANZAC Day. Still, consumer spending is sluggish, and particularly so in New South Wales that is likely a response to the cooling housing market. With the Reserve Bank of Australia widely expected to cut the cash rate by 0.25% today and the federal government intending to implement increased tax relief, that should offer some support for retail spending towards the second half of 2019.  

Net exports and public demand to drive Q1 Australian GDP growth

The ABS has released the remaining partial indicators ahead of tomorrow's National Accounts for Q1. Both net exports and public demand will contribute to the GDP growth outcome for the quarter. 

Balance of Payments, Government Finance  — Q1 | By the numbers

• Australia's current account deficit narrowed sharply by $3.425bn in Q1 to -$A2.9bn. This was in line with the median forecast (prior rev: -$6.325bn from -$7.203bn)

• The trade surplus jumped by $4.753bn to a record high $A13.594bn for Q1 (prior rev: $8.841bn from $8.425bn)

• Net Exports are expected to add 0.2ppt to GDP growth in Q1, in line with the median forecast, which is likely to reverse the -0.2ppt drag from Q4.

• The separate Government Finance release showed growth in underlying public demand lifted by 0.8% in Q1 and 5.4% through the year (prior rev +1.8%q/q and 6.0%Y/Y). The ABS reported that this was collectively expected to add around 0.2ppt to GDP growth in the quarter.

Balance of Payments, Government Finance — Q1 | The details 

Firstly, to the balance of payments data, the nation's current account deficit contracted from a downwardly revised -$6.325bn to -$2.9bn -- its lowest since 1997. The key was a sharp jump in the trade balance from $8.841bn to a record-high mark of $13.594bn. Earnings from exports drove this outcome via a 3.7% rise in the quarter to $11.896bn, which was driven mostly by a 12% rise in iron ore prices. Accordingly, the nation's terms of trade lifted in the order of 3.1% in the quarter. Meanwhile, the income deficit widened by 8.1% (or $1.192bn) to $15.984bn with mining profitability (and returns to overseas investors) lifting sharply. In volume terms, exports  lifted by 1.0% in Q1 (+1.7%Y/Y), while imports were soft at -0.1% (-0.5%Y/Y). Given exports increased by more than imports, the ABS reported that net trade was anticipated to add 0.2ppt to GDP growth in the quarter. 

Secondly, Government finance ex-transfers lifted by 0.8% in Q1 to $113.112bn, with the annual pace still strong at 5.4%, though it eased from 6.0%. This was led by consumption spending that lifted by 0.8% (+5.0%Y/Y), while investment (excluding transfers) lifted by a more modest 0.4% (+6.7%Y/Y). The ABS reported that the combined contribution to GDP growth in Q1 will be around 0.2ppt.       

Balance of Payments, Government Finance — Q1 | Insights 

Both releases were supportive for growth prospects in Q1. Even though growth in export volumes was not particularly strong, reflecting supply disruptions in the resources sector from adverse weather conditions, that should fade later on in 2019. Despite that, national income will receive a sizeable boost in the quarter from very high iron ore prices in particular. That bolsters the position of the Federal Budget and should support public demand through more spending and infrastructure investment.     

Preview: RBA June meeting

The Reserve Bank of Australia Board (RBA) is almost certain to lower the cash rate by 25 basis points to a new record low of 1.25% when Governor Lowe releases his decision statement at 2:30PM (AEST) today. The Board has maintained the cash rate at 1.50% since August 2, 2016, where Governor Stevens announced a 0.25% easing. 

There is almost no contemplation of any outcome other than a rate cut today. Financial markets are priced near to 100% for a cut, while 29 out of 30 economists surveyed by Bloomberg Australia forecast the cash rate to fall to 1.25% -- as close to being in alignment as is ever likely to be seen. 

At the previous meeting in May, the Board remained on hold in a finely balanced decision, in which markets and economists were roughly 50/50 divided on the outcome (see here). So, what has caused expectations to shift so definitively? 

There are 2 main reasons for this, and both occurred on the same day on the 21st May. Firstly, the minutes from the May meeting (which are released with a 2-week lag) signaled that the Board had shifted to an 'easing bias' by noting that its forecasts for growth and inflation were conditioned on market pricing "which suggested interest rates were expected to be lower over the next six months" and that in the absence of an easing "growth and inflation outcomes would be expected to be less favourable than the central scenario". The Bank's forecasts in 2019 and 2020 for growth (2.75%) and inflation (2.0%) would indicate an economy only operating around par in a best-case interpretation.

Secondly, around 90 minutes after the minutes were released, Governor Lowe delivered a speech that gave further insight around the Board's easing bias. As outlined here, the RBA had been consistent throughout the year in highlighting the importance of the labour market in its decision making. Conditions therein had generally been more robust than the Bank had anticipated, though in April the unemployment rate lifted from an upwardly revised 5.1% to 5.2% (see here). Inflation in Q1 also slowed by much more than expected (see here). The critical observation from the Governor was that in order to bring inflation back up towards the 2-3% target, the unemployment rate would need to fall below the historical estimate of full employment at around 5.0%. Specifically, the Governor highlighted that "we (the Board) discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5 per cent mark. In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate". 

So there you have it, the conditions for the Board's threshold to cut have been met. Attention will initially turn to the decision statement for signs of what the Bank's next course of action might be, though for that we might be better served by waiting until 7:30PM (AEST) tonight where Governor Lowe is due to deliver another speech. Governor Lowe's speeches are always interesting and, not unlike what we have discussed here, they have had a habit this year of delivering more than what was expected by markets.

Australian inventories rise; mining profits surge

Australia's Business Indicators data for the March quarter contained mixed details ahead of Wednesday Q1 GDP growth update. Inventories lifted unexpectedly, while the mining sector continues to drive company profits on very high commodity prices.  

Business Indicators — Q1 | By the numbers 

• Inventories increased by 0.7% in Q1 to $162.5bn -- the median forecast was for a flat outcome (prior 0.0%). Through the year, inventories lifted from 1.1% to 1.4%.

• Company gross operating profits lifted by 1.7% in Q1 to $90.03bn, lower than the forecast for 2.8%, easing the annual pace from 10.5% to 7.8%. 

• Growth in wages and salaries lifted by 1.1% in the quarter (prior 0.9%) as the annual pace lifted from 4.0% to 4.4%. 

Business Indicators — Q1 | The details

Australian businesses increased inventories by 0.7% over the March quarter after a flat outcome in Q4. The profile has been volatile over the past 4 quarters, but the annual pace remains subdued at 1.4%, though it did increase from 1.1%. For the March quarter, inventories lifted in mining (2.3%), manufacturing (1.4%) and retail (1.9%), while there were declines in utilities (-11.5%), wholesale trade (-0.6%) and accommodation and food services (-3.2%). The increase from the mining sector follows declines in the previous two quarters due to supply disruptions caused by adverse weather conditions. 

Gross company profits posted a 1.7% rise in the quarter, though growth over the year eased down to 7.8%. These outcomes were below expectations and slower than in the December quarter at 2.8%q/q and 10.5%Y/Y. Profitability continues to be led by the mining sector on the back of surging commodity prices, rising by a further 5.2% in the quarter to be 21.6% higher over the year. This contrasts with a subdued non-mining sector in which profitability was broadly flat in the quarter. There were increases for; utilities (1.8%), wholesale trade (2.8%), retail (0.1%), transport (3.8%), media and telecommunications (5.0%), finance (7.6%), professional services (5.0%) and administration (13.6%). Declines were recorded in; manufacturing (-1.5%), construction (-7.5%), accommodation and food services (-3.8%), real estate (-10.0%) and recreation (-15.5%). 

 

The outcome for wages and salaries, which flows through to the key Compensation of Employees figure in the National Accounts, lifted by another 1.1% in the quarter to $141.26bn elevating the annual increase from 4.0% to 4.4%. The ABS' labour force data indicated that employment growth lifted by 0.6% in Q1 and 2.4% for the year, while hours worked were up by 0.9% in the quarter and around 2.9% year-on-year. The pace of wages growth, however, still remains slow. 

Business Indicators — Q1 | Insights

Looking towards Wednesday's National Accounts, inventories appear likely to add modestly to output in the quarter after contributing 0.2ppt in Q4. The company profits component is split by strength in mining, which will flow through to increased federal tax revenues, against a subdued non-mining sector that is broadly reflective of soft domestic demand. The lift in wages and salaries continues to reflect the strength in employment growth, with a better contribution this quarter from hours worked.