GDP rebounds strongly in Q4

After a shock 0.5 per cent quarter-on-quarter drop in Q3, Australia’s GDP bounced back in Q4 by 1.1 per cent, according to ANZ.

According to the latest Australian Economic Update by ANZ, the country’s GDP bounced by 1.1 per cent quarter-on-quarter in the fourth quarter of 2016, bringing annual growth up to 2.4 per cent.

“As we expected, much of the weakness in Q3 was temporary and growth bounced broadly across the economy,” ANZ said.

The Q4 result was stronger than market forecasts, and stronger than that of the RBA which predicted a 0.8 per cent rise.

ANZ said that the results suggest that there was a “broad improvement” in momentum in the economy late last year.

“Consumer spending bounced, housing grew solidly, non-mining investment picked up, and public spending rebounded,” the bank said.

“Export volumes turned around, turning the net exports contribution positive. The better tone to the activity data is consistent with the improvement in business conditions and the employment data and has continued into early 2017.”

However, ANZ noted that while there are a number of positives regarding the outlook, including for business investment and external accounts, the question remains as to whether growth in consumer spending can continue to outpace household income growth.

“Wages are the largest component of household income and the overall wages bill fell 0.5 per cent in the quarter, while overall household income grew just 0.2 per cent (compared with 1.2 per cent growth in nominal consumer spending).

“Moreover, high and rising household debt in an environment of persistently low wages growth is likely to eventually crimp consumer spending in our view.”

Inflation indicators also remain “particularly weak” according to the bank, which highlighted that the household consumption deflator rose only 0.3 per cent and has grown by just 0.9 per cent over the past year.

ANZ concluded that while the RBA will be encouraged with the confirmation that the Q3 drop in activity was temporary, weakness in wages and the implications for the inflation outlook are “concerning”.

“Nominal unit labour costs are a key input into the RBA’s underlying inflation models, and the persistent weakness points to an ongoing absence of domestic costs pressures.

“In aggregate, we think the rate hikes are a very low way off and the RBA seems set to keep rates on hold for the foreseeable future.”

[Related: RBA tipped to emphasise ongoing low inflation]

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