Australian Q1 GDP: A solid outcome in context – Goldman Sachs

Australian GDP expanded +0.3%qoq in 1Q2017 (+1.7%yoy), in line with consensus expectations (GS: +0.2%qoq; BBG: +0.3%qoq) and was an encouraging outcome in the context of recent macroeconomic developments, feels the analysis team at Goldman Sachs.

Key Quotes

“This was an encouraging outcome in the context of i) earlier widespread speculation of a contraction in activity, ii) the robust expansion reported in 4Q2016 (strongest in over 5 years), and iii) adverse weather conditions resulting in net exports (-70bp) and housing construction (-30bp) stripping no less than 100bp from GDP growth in the quarter. Looking through some of this volatility, we note that annual growth in the broadest measure of domestic demand (gross national expenditure) accelerated +60bp to +2.4%yoy - its fastest pace since 2012 and broadly in line with its decade average.”

“Compositionally, the guts of the report were also encouraging - featuring a 33-year high in corporate profits growth, a broad-based expansion across 17 of 20 major industries, the first consecutive quarterly increase in business investment (ex-transfers) since 2012, a solid rebound in compensation of employees (+1.0%qoq), and an acceleration in consumption to +2.9% in 6-month annualised terms - a rate well above its decade average (+2.6%) and the more highly publicized weakness in the retail sales sub-set (+1.6%).”

“Looking ahead, a normalisation in weather conditions and mining investment/exports will provide a more favourable backdrop for growth, a solid pipeline for housing construction is consistent with a more elongated expansion, and we expect a large positive income shock will support stronger growth in wages and consumer spending. Against the backdrop of accommodative financial conditions, the positive signal from our data surprise index into 2Q2017, a strengthening labour market, decade high in surveyed business conditions, rising public infrastructure investment and a boom in LNG shipments - we agree with the RBA’s forecast strong recovery in Australian economic growth over the coming years.”

“With the RBA already forecasting inflation at the mid-point of its target and record low rates exacerbating financial balances, we believe the market is under-estimating the probability that rates move higher before the end of the year (GS: +25bp in November 2017).”