This is the first of our monthly reviews of the Australian economy containing also an update of our forecasts. Almost all regular economic readings produced by the Australian Bureau of Statistics (ABS) and the Reserve Bank deal with the past, some the quite distant past such as economic growth (GDP) data that are not released until almost three months after the period to which they relate. We start with a brief review of the past.
Real GDP growth was below trend in both Q1 and Q2 2013 at respectively 0.5% q-o-q and 0.6% q-o-q. In Q2 annual economic growth was 2.6% y-o-y below long-term trend growth around 3.0% and too soft to generate enough employment growth to cover the growth in supply of labour. The quarterly GDP growth rate in Q2 also looked weak on spending contributions with 0.2 percentage points of the 0.6% growth coming from a lift in inventories. Consumer spending and capital investment spending combined (final domestic demand) rose by only 0.3%q-o-q, and by 0.6% y-o-y. The final domestic demand measure also provides an indication of differences in growth among the states. In the quarter final domestic demand was particularly weak in Tasmania, -0.3%, and Victoria, 0.0%. In contrast final domestic demand was rather better in New South Wales, +0.5%, and South Australia, +0.5%, and relatively firm in Queensland, +0.6%, and Western Australia, +1.3%.
Monthly labour force data are published on a more timely basis than GDP data, but still look to the past. Decisions to employ people usually require an improvement in economic conditions and then there is a further lag between deciding to employ a person and fulfilling the decision. The latest August employment data point are consistent with weakening economic conditions through the first half of 2013, much as indicated in the GDP data. Employment fell by 10,800 in August, the second consecutive monthly fall, and is up only 0.9% y-o-y, below the roughly 1.2% y-o-y threshold needed to stabilise the unemployment rate. The unemployment rate has been drifting upwards through 2013 to date standing at 5.8% in August.
There is no doubt that Australian economic activity was comparatively soft through the first half of 2013. The indicators that provide more colour on how the economy is travelling currently and where it is likely to go, however, are mostly stronger, particularly the leading indicators. Improving housing activity is usually a sign that a more general lift in household spending is coming. Housing finance commitments for owner-occupiers have lifted each month in 2013 so far and in July were up by 2.4% in the month and by 15.9% y-o-y. House prices have also been rising and according to the ABS were up in Q2 by 2.4%q-o-q, 5.1%y-o-y. Even stronger house price growth seems to have occurred in Q3 according to private real estate data. Home building activity is showing signs of improvement too with council approvals to build homes up in July by 10.8% in the month and by 28.3% y-o-y.
Retail sales have been quite weak, up only 0.1% in July and up 1.9%y-o-y. However, consumer sentiment measured by the Westpac/Melbourne Institute survey has been increasing over recent months. The September survey, admittedly influenced by the federal election, showed a 4.7% increase to 110.6, well above the long run average of 100 and the highest reading since December 2010. Most likely retail sales will start to improve over coming months, given that consumer sentiment is high, households have the wherewithal to spend by edging down the very high savings ratio of the past few years and that a lift in housing activity usually promotes stronger retail sales in its wake.
Our view is that GDP growth will still be a touch below trend in Q3 (data to be released mid- December) around 0.7% q-o-q, 2.5% y-o-y, but should slowly accelerate beyond. We do not see annual GDP growth moving above long-trend 3% y-o-y until the second half of 2014. Below trend GDP growth in the meantime means that the RBA is likely to remain reasonably comfortable in its view that inflation will stay in 2% to 3% target range through 2014. We see little pressure on the RBA to start raising the cash rate until later in 2014, but further reductions in the cash rate are unlikely given the price pressures developing in the housing market.
International economic conditions will of course influence our Australian forecasts. Our underlying assumption is that global growth will improve slowly through 2014. China will grow around 7.5% in both 2013 and 2014, sufficient to keep commodity prices relatively high and to limit the extent of the pullback in Australian mining investment spending. We will update our analysis and forecasts of the Australian economy on a monthly basis with the next review on Monday 28th October.