The Australian economy has beaten expectations, with very strong 1 per cent growth in the first quarter driving a 3.1 per cent annual increase in GDP.
But economists have warned that may be “as good as it gets” with a range of one-off factors boosting the data and weak household income growth limiting consumer spending, which makes up about 60 per cent of the economy.
The Australian Bureau of Statistics data show commodities exports were the key driver of growth in the March quarter.
“Growth in exports accounted for half the growth in GDP and reflected strength in exports of mining commodities,” the bureau’s chief economist Bruce Hockman said.
The mining sector’s output grew 2.9 per cent, thanks to increases in coal, iron ore and LNG production.
Mr Hockman said this fed through to the strongest increase in corporate profits over the past year, up 6 per cent in the March quarter.
“The rise in profits was consistent with the strong increase in mining exports coupled with a lift in the terms of trade this quarter.”
The rise in corporate profits has also prompted businesses to increase their investment in machinery and equipment, including outside the resources sector.
Government consumption increased spending rose 1.6 per cent in the quarter and was up 5.1 per cent over the past year, boosting GDP, although public investment spending eased slightly from very high levels.
Consumers struggle with ‘no real wage gains’
However, while businesses and governments were spending, consumers had their wallets closed.
Household consumption grew a tepid 0.3 per cent in the first quarter, and even that was driven by spending on essential goods and services.
Household consumption was up just 2.9 per cent over the past year and most economists do not see that improving.
“With jobs growth slowing sharply, wage rises still tracking inflation (resulting in no real wage gains for the average worker), and house price falls reducing households’ net worth we expect spending momentum to remain subdued through the rest of this year,” said the head of macroeconomics at BIS Oxford Economics, Sarah Hunter.
Even though spending growth was weak, the household savings ratio fell further to more than a 10-year low of just 2.1 per cent.
It is this continued weakness in household consumption, along with a significant bounce in dwelling investment that is unlikely to be sustained, that have many economists warning the March quarter is likely to be the peak of growth for a while.
“We suspect that may be as good as it gets, especially if the royal commission leads to slower credit growth,” Paul Dales from Capital Economics said.
“We doubt that the strength of net exports will be sustained as there was an element of catch-up after production problems in the second quarter and third quarter.
“But we fear that still subdued real income growth and the weakening housing market will mean a lot of the softness in consumption lingers.”
JP Morgan’s Tom Kennedy also believes the main factors drivers of the Australian economy’s strong start to the year will be “somewhat fleeting” with the key household consumption sector, about 60 per cent of the economy, “largely absent”.
“Today’s result is strong, though does not change our view that Australia’s longer run growth prospects remain challenged and less upbeat, with household consumption to remain hamstrung by benign wages growth and an already low saving rate,” he wrote in a note.
“Private capex should offer somewhat of an offset, though the recent data has surprised to the downside and evidence of a sustainable recovery remains elusive.”