The improvement in the Australian economy is gathering pace although with grudging recognition at best from many analysts. Last week, the unemployment rate falling to a five-year low 5.3% in July was barely acknowledged as good news. Equally grumpily received was the best quarterly lift in wages in four years in Q2, +0.6% q-o-q, and it is likely that even better quarterly results are likely soon as the labour market continues to tighten.
The combination of a falling unemployment rate and rising wages in Q2 means that household disposable income lifted quite sharply in Q2, much as it did in Q1. Moreover, household disposable income looks set to continue rising in Q3 as wages continue to rise and the unemployment rate falls further.
The improving pace of growth in household disposable income so far this year is starting to show in a marked lift in retail spending with the volume of sales up 1.2% q-o-q in Q2 after lifting 0.2% in Q1. Household consumption spending is likely to make a substantial positive contribution to Q2 GDP growth (release date 5th September).
Household consumption is unlikely to be the only substantial positive contributor to GDP growth in Q2. Business investment spending should be a strong contributor too. Australian business profits have been rising mostly over the past year and according to the Australian Statistician company gross operating profits rose by 5.9% q-o-q in Q1 2018. Another strong lift in profits seems likely to have occurred in Q2 based on the mostly favourable reports in the current company profit reporting season. Strong growth in company earnings is a key factor determining whether companies are likely to increase spending.
All told, notwithstanding some wobbles in parts of the housing market, the private sector of the Australian economy (households and businesses) seems likely to have lifted spending at a materially faster pace in Q2 than in Q1.
Turning to other parts of the economy, Government spending probably grew on par with growth in spending in Q1. The international trade sector of the Australian economy – net exports – contributed 0.4 percentage points to the 1.0% q-o-q GDP growth in Q1 and although export volumes have lifted in Q2 the contribution to GDP growth in Q2 is likely to be small, say around 0.1 percentage point.
Weighing up the various Q2 GDP growth contributions a second consecutive quarterly GDP growth rate of 1.0% q-o-q, or more, seems likely. It has been six years (first half of 2012) since the Australian economy grew as fast and strung together consecutive 1.0% or better GDP growth quarters.
There are a few more Q2 data points due between now and the GDP release including private capital expenditure next week and early the following week business, government and net export reports. These reports will provide more clues whether Australia is on track for back-to-back 1.0% or better GDP growth quarters but at this stage we are confident they will support the case.
On 5th September the evidence is likely to be plain in the Q2 GDP report that in the first half of 2018 the economy has been growing at its best pace in six years. Given that it has been a faster pace of growth in business and household income that has generated stronger GDP growth there is a strong likelihood that better GDP growth will continue in Q3.
Despite concerns often expressed about pockets of the Australian housing market, the high debt burden of Australian households and drought in the eastern states, it is worth keeping in mind that many other parts of the economy are growing well. The pace of Australian economic growth is stepping up and in time the weight of positive economic reports will prove it.