Key economic indicators

Indicator Last reported result Comments
Gross Domestic Product (GDP)
0.8% q/q Dec'13
2.8% y/y
GDP is the official measure of economic growth in Australia. The December quarter saw strong contributions from Net Exports as commodity volumes rose and capital imports fell. Household consumption rose by 0.8% and Public Investment increased by 4.3%.
12mth Outlook: Positive
Retail Trade
1.2% m/m Jan'14 6.20% y/y Retail trade is at a 4 year high and now well above the long term average.
12mth Outlook: Positive
New Orders PMI
Services
50.0 Feb'14 Manufacturing
55.2 Feb'14
The latest survey indicates that manufacturing activity is improving while services are flat. (A reading above 50 means that new orders are improving, a reading below 50 means that new orders are contracting.)
12mth Outlook: Modest improvement expected
Business Investment
-3.6% q/q Dec'13
-2.0% y/y
Result is indicative of the slowdown in mining investment and manufacturing generally.
12mth Outlook: Modest improvement expected
Unemployment
6.0% Feb'14 Over 80,000 full time jobs were created in February, the largest monthly gain since August 1991. The unemployment rate remained unmoved however due to an increase in the participation rate (number of people re-entering the workforce).
12mth Outlook: Stabilising
Inflation & Interest rates

Inflation 0.8% q/q Dec'13 2.7% y/y

Official Cash Rate 2.50% Mar'14

Underlying inflation (as measured by the trimmed mean) is running at around 2.6% p.a. The recent increase in inflation and strengthening trend in retail sales, home prices and building approvals is likely to put upward pressure on inflation and hence increase the likelihood of an interest rate rise in coming months.
12mth Outlook: We expect the official cash rate to rise by at least 0.50%.
Australian Dollar
A$/US$0.9195

Comments

The AUD rose over the quarter as data confirmed that the economy is improving. Conflicting forces means that the short term outlook will be difficult to predict. The strengthening economy and potential for interest rates to rise modestly will put upward pressure on the dollar. On the other hand, the gradual withdrawal of monetary stimulus in the United States and uncertainty regarding the extent and timing of a slowdown in China will exert downward pressure on the dollar.

12mth Outlook: Nominal devaluation expected

Conclusion

Economic growth of 2.8% over the year is now just below the longer term trend of 3.0%. Most economic indicators released since 31 December suggest that the growth trajectory continues to improve. Historically low domestic interest rates have encouraged borrowers to invest in property that in turn has led to a surge in house prices, building approvals and residential construction activity. The improvement in household wealth has finally enticed consumers to spend again which has boosted the profits of retailers and in particular those exposed to the housing sector. In addition, although the mining investment boom has ended, the resultant increase in volumes has provided a significant contrition to net exports.

These are all positive developments but as noted in our January commentary, the current growth resurgence is based on relatively weak fundamentals and is unlikely to last over the medium term for a number of reasons:

  • The current housing boom is unsustainable. Cheap credit that has spiked asset values will not last forever and household debt levels are already among the highest in the world.
  • Manufacturing remains broadly uncompetitive despite the fall in the dollar.
  • Demand for Australian resources will inevitably slow as China eventually deals with the vast overinvestment in residential property and infrastructure, which is set to trigger a wave of bad debts.

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