Australia: A year of divergence between business and households - NAB

Analysts at NAB note that Australia’s economic growth largely transpired in 2017 as expected, with real GDP growth picking up to 2.8% y/y in the September quarter, only a touch below NAB’s forecast of 3.0% y/y made at the end of last year.

Key Quotes

“Within the total: 

• Household consumption underwhelmed as we had foreshadowed, with growth of 2.2% y/y in real terms (we had forecast 2.3% y/y) and 3.4% in nominal terms. This was despite stronger than expected employment, with 316K jobs added in the ten months to October (266K of them full-time), and the unemployment rate easing to 5.4% (c/f our forecast of 5.7%).
• Growth in business investment has been stronger and come a little earlier than expected (up 7.8% y/y in underlying terms in Q3) despite mining investment declining as large projects ended. Instead, non-mining investment has increased much more strongly than forward-looking indicators such as the capex survey suggested, and while business conditions softened in late 2016 (prompting us to be cautious about investment), conditions subsequently rose strongly and broadened across industries (with the exception of retail). This was enabled by strength in corporate profitability, both in mining (thanks to surprise surges in coal and iron ore prices earlier in the year), but also non-mining.
• Meanwhile, dwelling construction looks to have peaked a little earlier (late 2016 versus our expectation of late-17 or early-18, although we had flagged the possibility of an earlier peak). This could be a positive signal as it suggests a more elongated cycle with reduced possibility of sharp decline, and we note that dwelling approvals have picked up again.
• Net exports failed to add to growth as expected, with a subtraction of 0.4ppt over the year to September. Some gains from private and public investment were offset by higher capital imports, even looking through the import of large LNG floating platforms. This, together with appreciation of the AUD, delays in LNG exports and weather disruptions hitting iron ore and coal exports weighed on (still respectable) exports growth. That said, services exports (tourism and education) surged and surprising strength in commodity prices (particularly iron ore and coal earlier in the year) helped the trade balance remain in positive territory, and the current account deficit shrink.”

“Underlying inflation remained below the bottom of the RBA’s 2-3% target band at 1.8% y/y in September, a little lower than our forecast of 2.0% y/y. Strong retail competition, margin compression, weak wages growth and a stronger than anticipated AUD all played a part.” 

“A less hawkish US Fed and softer USD, as well as upside commodity price surprises, were key reasons for the AUD appreciating rather than depreciating this year, peaking at just over USD0.81 in September but easing back to USD0.75 at the time of writing as rate differentials finally moved against the currency late in the year.” 

“The RBA’s focus changed through 2017 towards concerns about house price growth and household balance sheets. Stronger employment also allowed the central bank to shift its attention, despite wages and inflation failing to pick up. Equally, while the central bank became increasingly nervous about stoking an already hot property market, it refrained from hiking rates given the still fragile nature of the economic recovery and concerns about unduly crunching household spending -- macro-prudential measures were instead used to slow housing credit. We removed our expected rate cut early in the year (and in September brought forward the expected timing of the first rate hikes to Aug & Nov-2018).”

“All in all, 2017 was a year in which outcomes for businesses and consumers diverged, in which the property market eventually slowed but later than  expected, and a year in which the RBA remained on the sidelines.”