Australia: Stronger real GDP growth of 1.1% in Q1 2016 - NAB

Research Team at NAB, notes that today’s Australian National Accounts revealed stronger real GDP growth of 1.1% in Q1 2016 (up from 0.7% in Q4 2015).

Key Quotes

“It was above the market expectation of 0.8% but in line with our forecast – with the composition of growth very similar to what we were expecting. Year-ended growth also picked up to a solid 3.1% y/y.

Consistent with the closing phases of the mining boom, a strong contribution from net exports – bolstered by commodity production – was largely offset by sharp declines in mining investment.

Domestic final demand has remained subdued due to the contraction in mining investment, but industry gross value added figures demonstrate a non-mining recovery that is gaining traction, especially in the services sectors.

By state, the mining vs non-mining divide is very apparent, with most of the growth in domestic final demand coming from NSW, while WA and NT declined – albeit at a slower pace than last quarter.

The terms of trade fell a further 1.9%, to be 11.5% lower over the year, which continued to weigh on measures of national income.

A solid increase in commodity production, and more subdued employment growth, likely underlied an improvement in productivity measures in Q1.

Price indicators in the National Accounts generally followed the very weak outcome seen in the Q1 CPI. The GDP deflator – the broadest measure of inflation – recorded a decline of 0.6% in the quarter, while the consumption deflator fell 0.1%.

The RBA is likely to look through the strong Q1 GDP result given it was largely due to a lift in exports that is not expected to be sustained in the medium term. Additionally, the subdued Q1 CPI figure means the RBA will also be focused on the national accounts measures related to prices, including wages, unit labour costs, and the consumer price deflator – which were also subdued.

At this stage, NAB expects the RBA to remain on hold for the remainder of 2016, though we do acknowledge a further rate cut remains a possibility if inflation continues to surprise to the low side. With activity indicators positive NAB does not expect any consideration of further easing before the next CPI release (released 27 July).”