Much of the copious amount of Australian economic data released over the past week or so is reminiscent of the old Road Runner cartoons, more particularly the coyote character. The poor old coyote made a habit of running off cliffs, looking bemused, and then falling rapidly to earth. The Australian economy is not exactly like the coyote in the Roader Runner cartoon, but it is not far off. There are some signs that growth is on a firmer footing – housing activity is very strong, there is a flicker of life in household consumption spending and the volumes of exports are lifting nicely too. But there are also ominous signs that the ground is threatening to crumble too – real national disposable income growth has ground to a halt, household spending growth has become contingent upon households running down savings, housing appears to be in unstable bubble territory in Sydney and Melbourne and the hole in business investment spending continues to grow bigger.
The Q1 GDP report released last week illustrated the contradictions that abound in the Australian economy. Overall real GDP growth seemed very strong in the quarter, up by 0.9% q-o-q, strong enough to limit the slowing in annual growth to 2.3% y-o-y, better than the reduction to 2% or less widely feared ahead of the GDP release. Even a quick look at expenditure contributions to GDP, however, revealed potential softness below the headline reading.
Net exports contributed more than half of GDP growth in the quarter (0.5 percentage points of total 0.9pp). A lift in stocks or inventories added another 0.3pp. Excluding the contributions from net exports and stocks and inventories growth was down to very skinny 0.1pp – in fact the statistician estimated domestic final demand in the economy as being flat in Q1 and up only 0.8% y-o-y.
The huge spending categories in the domestic economy – household consumption spending (0.3pp contribution to growth in Q1); housing (0.2pp); private gross fixed capital formation less housing (-0.4pp) and total government spending (0.0pp) aggregate to only 0.1pp contribution to GDP growth. Disturbingly, the two strongest parts of this domestic spending in the quarter, household consumption spending and housing are precariously supported looking ahead.
In order to spend the way they did in Q1, households needed to draw down their savings. Household income was barely growing and persistently low wages growth means that household income growth is unlikely to pick up pace in coming quarters. The household savings ratio slipped to 8.3% in Q1 2015 from 8.8% in Q4 2014 and the ratio of savings from household disposable income will need to keep falling at least as fast as it did in Q1 if household spending is to continue growing. Households will need to be optimistic and confident if this is to occur and that may prove to be a tall order.
In terms of spending on housing the low interest rate, high foreign housing merry go round is still spinning at furious pace, but house prices have risen at a pace bearing all the hallmarks of bubble in Melbourne in Sydney. APRA jaw-boning lenders about their lending standards; a more concerted effort enforcing existing guidelines on foreign investors trying to buy existing homes; a threat of more challenging investment conditions approaching in China (the main source of foreign investment buying in Australian housing; and even the more widespread warning chatter that the housing market is in a bubble and buyers should beware imply that spending on housing at the very least will not grow at the frantic pace that occurred in Q4 2014 and Q1 2015.
In short, the two stalwarts of domestic spending growth are looking shaky. Business investment spending is showing no signs of taking a turn for the better (why would it with domestic spending growth in the Australian economy looking so fragile, potentially). Even part 2 of the great resources boom – the lift in export volumes – while contributing strongly to growth in Q4 2014 and Q1 2015 looks like taking a breather in Q2. The stunning deterioration in Australia’s monthly international trade position in April to $A3.9 billion deficit from $A1.2 billion in March is one harbinger of a weaker Q2 net export contribution to growth. Another is sharply falling imports in to China in May revealed in their latest monthly trade data, particularly a sharp fall in iron ore imports.
The Australian coyote is just about running on firm ground, but the earth is starting to crumble. Much weaker growth seems to lie not far ahead and the RBA will continue to keep its finger on the trigger to cut rates lower if needed.