Australia is winning a pot of gold medals at the Commonwealth Games, but a less recognized achievement is that the Australian economy is showing more consistent signs of growth early in 2018. Key monthly economic data relating to January and February are mostly shaping up quite well and indicate a Q1 GDP reading of at least +0.6% q-o-q at this stage. Importantly, there are also some signs that a stronger Q1 GDP reading will not fall back to a weak report in Q2. The saw-tooth movement in Australian quarterly GDP growth evident through 2016 and 2017 – strong one quarter and weak the next – may at last be changing to a more consistent upward trend. If this better growth trend occurs watch for the RBA to start talking more about the likelihood of higher Australian interest rates over coming months ahead of a first cash rate hike around August or September.
There are still potential downside risks to the improving Australian growth story of which the biggest risk is an escalating international trade war. If the current spat between the US and China worsens to the point of materially cutting in to China’s export and broadens to encompass other Asian and European exporters, then Australia’s growth prospects would worsen. Hopefully, the risk of full-scale international trade war is low.
One prominent downside risk to Australia’s growth prospects has been the fragility of the heavily-indebted household sector and the possibility that households could become more reluctant to spend in a challenging environment of weak wages growth and much more limited growth in house prices. Over the last month or two this downside risk to growth relating to potentially weak household spending seems have become less of a risk.
Several developments in the Australian economy are working to shore up the financial position of the household sector. One of these developments is quite longstanding, robust employment growth month-to-month providing the confidence for more people to join the labour force seeking work. Strong growth in employment, up more than 3% over the past year, is helping to boost household disposable income at a time when wages growth has been unusually low.
Regarding low wages growth suppressing growth in household disposable income it is fair to say that lowest point in annual wages growth is almost certainly in the past (around mid-2017) and there has been a minor lift just above 2% y-o-y since the low point. There are increasingly compelling arguments why wages growth should rise further this year and in 2019. Job vacancies are at a record high and in several sectors of the work force employers are finding it increasingly difficult to fill positions. Higher wage settlements are starting to show in key areas, such as the recent 3%+ plus pay deal for NSW train drivers, setting a new and higher benchmark for pay negotiations. The talk around the Government’s proposed company tax cuts is also revolving around companies paying higher wages in return.
It is fair to say that much of the Australian work force can expect with some confidence that their next pay negotiation round will deliver a higher wage rise than the last providing a significant boost to consumer sentiment.
The Achille’s Heel of the household sector is its high debt load, but a few developments are worth keeping in mind. On the positive side household debt as a proportion of household disposable income although high appears to be plateauing. Servicing debt is becoming easier for many with a renewed bout of competition among home lenders chasing market share reducing some home loan interest rates.
On the negative side, lending conditions for investors in residential real estate have tightened considerably over the past year and to the point of causing genuine stress for some. Overall, however, the household sector’s high debt burden has become easier to manage over recent months.
There are certainly signs that the household sector is showing signs of spending a touch more freely in monthly retail sales data. Retail sales were much better than expected in February lifting by 0.6% m-o-m and that coming after an upwardly revised 0.2% gain in January. Household consumption spending was up 1.0% q-o-q in Q4 2017, its strongest showing in almost two years. At this stage, household consumption in Q1 seems to be on track to match, or better, the strength exhibited in Q4.
Another positive in Q1, albeit a rather back-handed one, is that housing is not as weak as feared so far in Q1. What price falls there have been in the previously bubbling Sydney housing market appear to be moderating. Home building approvals although very choppy month-to-month are on trend plateauing around a respectable monthly 18,800.
A more clear-cut positive in Q1 is that Australia’s international trade has generated big surpluses in both January and February, $A1, 777 million cumulatively for the two months against a cumulative deficit of $A749 million for the three months ending December. Importantly it has been a big lift in exports in January that held up in February that has made almost all the contribution to the turnaround in the trade position. Exports are likely to contribute strongly to Q1 GDP and barring a worsening international trade war are likely to keep contributing in Q2.
As the gold medals hopefully keep coming on the Gold Coast the Australian economy is at last showing signs of deserving a gold medal too for a more persistent growth performance now in the making.