Australia: GDP growth accelerates in Q2

Growth in the economy accelerated in Q2, after a disappointing performance in Q1. In the second quarter, GDP expanded a seasonally-adjusted 0.8% over the previous quarter, up from the 0.3% expansion registered in the first quarter but slightly below the 0.9% expansion analysts had expected. A year-on-year comparison showed GDP growth in Q2 was on par with Q1’s 1.8%.

The improvement was broad-based with both domestic demand and the external sector contributing to the upswing. Household consumption expanded 0.7% quarter-on-quarter in Q2 after growing 0.5% qoq in Q1. However, the small improvement in household spending was driven by households choosing to save less rather than by increased wages. As such, the pace of growth of household consumption is unlikely to be sustainable if wage growth remains weak. The acceleration in government consumption (Q2: +1.2% qoq; Q1: 1.0% qoq) is also unlikely to be sustained through the end of the year, as the uptick was led by reconstruction spending after Hurricane Debbie. Fixed investment also accelerated, growing 1.5% qoq in Q2, up from 0.4% in Q1.

On the external front, exports accelerated thanks to the upswing in commodity prices. They grew 2.7% in Q2, contrasting the 2.2% contraction registered in Q1. Import growth slowed to 1.2% from 2.2% in Q2. As such, the external sector contributed 0.3 percentage points to growth in Q2, contrasting a 0.9-point deduction in Q1.

Looking ahead, economic growth is expected to accelerate moderately in the near-term as the labor market continues to improve and non-mining investment gathers speed. The economy will also benefit from the current upswing in commodity prices, but the risk of an appreciation in the currency could somewhat mitigate the effect. There is also uncertainty in the coming months due to the expected tightening of monetary policy, as the RBA shifts its focus away from price stability to financial stability concerns.

The Reserve Bank of Australia (RBA) sees the economy growing between 2.0% and 3.0% in 2017 and between 2.5% and 3.5% in 2018. FocusEconomics Consensus Forecast panelists see the economy expanding 2.3% in 2017, which is unchanged from last month’s forecast. For 2018, the panel expects economic growth of 2.7%, also unchanged from last month’s estimate.