Health of Australia’s Eight Key Economic Factors

Below is a snippet on how Australia has been doing in terms of its key economic factors:
 
GDP slowed drastically in Q2:Australian economy slowed considerably in the second quarter of CY16 with GDP growth of 0.5% quarter on quarter (qoq), well below the 1.1% expansion in Q1CY16. The poor quarterly result was driven by lower private consumption and a negative contribution from the external sector.  However, it is worth noting that Q2’s results marked a 25 years of growth without a recession but it is lowest growth since Q2CY15. On annualized basis, GDP growth improved from 3% in the first quarter to 3.3% in the second quarter, which is the fastest pace in four years. Domestic demand, which is the primary driver of the growth, grew from 0.4% in Q1CY16 to 0.6% in Q2CY16 backed by rise in government consumption, which nearly doubled, from 1% in Q1CY16 to 1.9% in Q2Y16. Export growth however slowed down from 3.1% in Q1CY16 to 1.3% in Q2CY16 but import grew 2.7% in Q2CY16 from 1.9% contraction in Q1CY16.

Changes in GDP in % (Source: Australian Bureau of Statistics)
 
Unemployment at 3-year low level while population growth is seen: The labor market lost 3,900 net new jobs in August as compared to previous month in seasonally adjusted terms. In July 2016, over 26,200 were new jobs that were created. The steep drop was observed of part-time positions, which fell by 15,400 against a rise of 69,600 in July. The number of full time position however grew by 11,500. The labor participation rate was down from 64.9% to 64.7% while unemployment rate fell down to 5.6% in August from 5.7% in July, the lowest since July 2013. On the other hand, Australia’s population grew by 1.4% during the year ended March 2016 to 24,051,400 people, which is an increase of 327,600 people since March 2015. Natural increase and NOM (Net overseas migration) contributed 44.8% and 55.2%, respectively, to total population growth for the year ended March 2016. All state and territories recorded a positive population growth in the year ended at March 2016. Victoria recorded the highest growth rate of all states and territories at 1.9%. The Northern Territory recorded the lowest growth rate at 0.4%.

Note: Seasonally-adjusted unemployment rate in % and new jobs in thousands
Australia unemployment chart (Source: Australian Bureau of Statistics)
 
Interest rates at record low: RBA kept its policy rate steady at its all time low of 1.5%. The RBA had cut its rate by 25 basis points twice this year in May and August.  The decision came against the backdrop of low inflation, slow wage growth and slight moderation in housing prices. Furthermore, the bank downplayed the risks of lower interest rates for the housing market. 
 
Business confidence picks up:The business confidence index has also witnessed some rise from its July levels to August 2016. This indicates that the Australian businesses are more optimistic regarding economic conditions in the coming months. Business conditions were mostly buoyant in the services and construction industries while condition in wholesale and retail trade were subdued.
 
Consumer sentiments edge up in September and follow trend in October:The Westpac-Melbourne Institute Survey of Consumer Sentiment enhanced by about 0.3% in September, as the index rose from August’s 101 to 101.4. It was further noted that consumer sentiments had remained stable over the past six months. Further, the 1.1% surge in consumer confidence in October reinforces the state.
 
Inflation stays low: Consumer price in Australia rose 1% through the year to the June quarter of 2016 from 1.3% in the previous quarter. It was the lowest inflation rate since the second quarter 1999. On quarterly basis, consumer prices rose 0.4% following a 0.2% drop in the previous three months. RBA weighted mean CPI rose 1.3% year on year (YoY) in three months to June as compared to a percentage in previous quarter. For 2016, the Australia’s Central Bank targets core inflation of between 2% to 3% on average.
 
Property market with mixed sentiments:The outlook for property markets outside the Sydney, Melbourne and Hobart has been patchy. Demand for property in the smaller cities and across rural Australia is not as strong. This means price levels are far more tied to factors such as housing affordability, interest rates, rental yields and lending conditions.  Record low interest rates and property boom has made it very attractive for developers to build more and more apartment blocks. Sydney prices were reported to be up 9.1% in last 12 months while in Melbourne it is 7.5% and Hobart it is 6.2%. Prices in Perth have dropped 5.6% in last 12 months while Darwin prices are lower 7.6% and it is likely that the prices would remain weak in next 12 months as well.  The ratio of household debt to GDP has risen from 40% to over 100%.
 
Average weekly earnings grew 2.1%:  In twelve months ended at May 2016, full time average weekly ordinary time earnings increased by 2.1% to $1,516 while full time adult average weekly total earnings in May 2016 was $1,575.4, a rise of 1.9% in the corresponding period. All employees’ average weekly total earnings enhanced by 2.1% to $1160.9. Early data of the third quarter suggests a mild improvement over the second quarter result, with unemployment dropping to a new multi-year low of 5.6% and business confidence bouncing back to its long-term average in August. The ongoing improvement in consumer confidence eased slightly in September.
 
Given the above and current developments, it is to be seen whether RBA’s target of economy growth between 2.5% to 3.5% in 2017, will be met.

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