Economy is still a picture of strength

This month’s data for Australia has provided convincing evidence that the local economy is still in good shape overall.

Whichever way you look at the gross domestic product numbers for the first quarter of 2012, they were a picture of strength.

GDP rose by 1.3 per cent in the first quarter and 4.3 per cent year-on-year. For the past two quarters, annualised growth averaged 4 per cent.

Mining was a huge contributor, as expected, (see the GDP growth chart).

But it was not the full story.

Household incomes have continued to grow solidly and household consumption surprised most analysts on the upside, rising by 4.2 per cent year-on-year.

There was some evidence of unevenness in growth across industries and states but overall growth was strong.

Jobs data for May confirmed strong conditions continued into the second quarter.

For the first five months of the year, 25,000 jobs were created a month.

With the unemployment rate at 5.1 per cent, the economy is close to full employment.

There was also saw some evidence of improved labour productivity growth and easing unit labour costs this month.

If these trends persist, they will put further downward pressure on inflation.

The strength of the macro indicators for Australia was an upside surprise for most forecasters. In our view, this is due to rapid structural change, which is making it tougher to get a clear and timely read on conditions.

In part, this reflects that the timely Australian data relate to sectors that usually drive growth but have been weak recently – including housing and retail – while updates on the stronger parts of the economy – mining and services consumption – are more infrequent.

HSBC continues to expect solid growth this year and next. Lower rates and the recent depreciation of the Australian dollar are expected to result in some rebalancing of growth and should provide some protection from global downside risks.

We retain our GDP forecasts for growth of 3.3 per cent this year and 3.5 per cent growth in 2013, barring a significant global downturn.

Although there are clearly downside risks from abroad, local momentum is strong and the economy should get some support from lower official interest rates and a weaker Australian dollar.

The elephant in the room remains global risks.

The main risk is a further leg down in the European situation but the Reserve Bank of Australia seems to have cut rates ahead of some of these concerns.

The slowdown in Chinese growth is also of some concern, though our view remains that Chinese growth will pick up in the second half, supported by policy stimulus.

Our central forecasts for GDP are largely unchanged from those published in January, although the profile has clearly changed a little, with less growth expected in the second half of 2012 than previously.

Growth in mining investment is forecast to be a key contributor, although Reserve Bank’s interest rate cuts and the Australian dollar’s depreciation are expected to result in some rebalancing of growth in the second half.

We expect lower official interest rates to provide some support for housing construction and retail sales, while the lower Australian dollar is expected to take some pressure off the manufacturing industry and other import competing industries.

Underlying inflation is expected to remain within the Reserve Bank’s stated target band of between 2 per cent and 3 per cent, although we have in mind that it is likely to have troughed for this cycle (see the inflation chart).

The bottom line is that recent GDP and employment data have shown that the Australian economy remains in good shape.

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