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Australia's economy accelerates faster than expected on exports

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Bloomberg are reporting that Australia’s economy expanded faster than forecast in Q1 as exports rebounded, underscoring the central bank’s expectation of stronger growth this year.

Gross domestic product advanced 1% from the prior quarter, with overseas shipments accounting for half the expansion, the Australian Bureau of Statistics said. Economists had forecast a 0.9% gain. The economy expanded at an annual pace of 3.1%, also beating estimates for a 2.8% increase.

Australia’s economy enjoyed a tailwind from revived exports following disruptions late last year; it is set for a further boost from LNG shipments as large projects in the northwest come online. The central bank is acting as an anchor, keeping the benchmark interest rate at a record-low 1.5% and with no immediate prospect of a tightening; however, the reliance on overseas sales for growth was noted by economists.

“We doubt that the strength of net exports will be sustained as there was an element of catch-up,” said Paul Dales, chief economist for Australia at Capital Economics Ltd. “We fear that still subdued real income growth and the weakening housing market will mean a lot of the softness in consumption lingers.”

Reflecting weak wages growth, the household savings ratio fell to 2.1% in the first quarter, the lowest level since the final three months of 2007, from a downwardly revised 2.3% as consumers drew on funds to maintain spending. Household spending grew by just 0.3%, adding 0.2 percentage point to GDP growth.

Government spending advanced 1.6% as authorities in the eastern states embark on major infrastructure projects to cope with expanding populations in their major cities.

“Recent data on the Australian economy have been consistent with the bank’s central forecast for GDP growth to pick up, to average a bit above 3% in 2018 and 2019,” Governor Philip Lowe said Tuesday after standing pat for a 22nd month. “Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy.”

Yet the Reserve Bank of Australia chief’s optimism came with his repeated warning that a “continuing source of uncertainty is the outlook for household consumption” amid sluggish wages growth and high debt.

Traders are pricing in little chance of a rate hike before mid-2019 as the jobless rate remains well shy of the central bank’s estimated full employment rate at 5%. Only at that level or lower is the economy expected to generate sufficient wage growth to drive inflation back up to the midpoint of the 2 – 3% target range.

Wednesday’s report showed private investment in machinery and equipment continued to grow strongly, particularly in industries outside the resource sector. Production of coal, iron ore and LNG recorded strong increases.

Australia is the developed world’s most China-dependent economy, shipping vast quantities of iron ore to the mainland for steel production. At the same time, China’s burgeoning middle class is boosting demand for Australian education for their children and tourism as their economy – like Australia’s – transitions toward services.

“The better-than-expected data means we now see the economy expanding by close to 3% this year,” said Sarah Hunter, head of macroeconomics at BIS Oxford Economics in Sydney. “But with headwinds still coming from consumer spending and a downturn in residential construction activity set to materialise in the second half of the year,” growth is likely to slow in 2019.

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