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.