NAB Chief Economist Alan Oster provides his views on the Australian economy and why it continues to outperform following the release of National Accounts this week. This article first appeared in the Australian Financial Review here.
Many offshore commentators, noting the slowing in China, falling commodity markets and global monetary policy uncertainty, have long held the view that Australia is an accident waiting to happen.
However, the Australian Q4 GDP estimates – albeit backward looking – provide a good deal of reassurance in a world where central banks are increasingly opting to alternative monetary policy actions (such as negative interest rates – Japan, Europe and Scandinavia) and global equity and funding markets fret about a potential crunch in the global economy.
While the accounts may in the near term help to offset the fears of the pessimists, the real lessons are not so much in the numbers themselves but in the composition of how Australia is rebalancing its economy – with the implication that this is no flash in the pan.
Clearly, the sluggish state of the global economy and trade, the fall in commodity prices and the retreat in mining investment all make for incredibly difficult times for the mining and mining services sector. That in turn has important differences on economic activity by region.
For Australia, the fears of falling GDP clearly overlook the impact of LNG exports, which means net exports are likely to add around 2 per cent to GDP itself over the financial year 2016/17. Rather, the real challenge for Australia has been to offset the massive falls that mining investment will subtract from domestic demand (lower mining investment drove engineering construction down 12% in Q4, by itself a detraction of around 0.6 percentage points from GDP). Ultimately it is demand that is the key driver of employment.
In Australia, key factors used to support demand include: continuing record low interest rates; a sharp fall in the AUD; wealth effects from property prices especially in NSW and Victoria; and, the absence of attempts to offset the automatic stabilisers that come from larger fiscal deficits.
To readers of the NAB’s Monthly Survey it would be no surprise that the service sectors have very much stepped up and are now driving an impressive rebound in non-mining domestic demand (indeed the Survey implies non-mining demand growth of around 4%). The really important point from the National Accounts is these views have been reaffirmed.
Looking at the Q4 accounts in more detail, the key messages include: household spending is picking up strongly (consumers are less scared as the employment situation improves – and hence with low income growth the saving ratios fell to 7.6% – a level not seen since the GFC). Also that non-mining investment significantly moderated the raw fall in mining investment and profits actually increased despite a fall in the terms of trade of around 3%, and net exports contributed nothing for the December quarter at least.
As noted, industry data suggests the recovery across the non-mining economy gathered steam in late 2015. Output in labour-intensive services industries such as real estate, IT, financial services, health, public administration and arts & recreation were strong, consistent with the NAB measure of business conditions and strong employment. Retail and wholesale trade output were also solid. As expected, the pattern of geographic growth very much reflected the services/mining mix of industry.
Once the importance of the industry split is understood, together with low wage cost growth, the recent evidence of surprisingly strong employment growth becomes (at least in part) more understandable.
So, if the non-mining economy was showing lots of momentum in late 2015, is that likely to continue?
In my view, the key drivers of the services recovery remain intact. And of course net exports are unlikely to be anything other than positive over the next year or so. As a result, we still expect GDP to increase by around 2.7% in 2016 and rising to near 3% in 2017 (as LNG exports really kick in). Such an environment should see the unemployment rate gradually edge down to around 5.6% by late 2016 and a touch lower into 2017. That in turn would see the RBA on hold for all of 2016.
Of course, good economic performance in the past does not necessarily guarantee good ongoing performance. Clearly global events are very important and as noted the global outlook is not flash. The RBA will in particular be very closely watching the non-mining economy and unlike many other economies has lots of scope to help further – if needed. However, at this stage the evidence is reassuring that they will not be called upon to act.