Australian economy and dollar hotting up despite slow wages growth

Australian economy dollar up slow wages growth

The Australian economy is starting to build up a head of steam with economic growth accelerating to 3.1 per cent a year after a strong first quarter, pushing the Australian dollar up a quarter of a cent to US$0.7665.

The stronger than expected growth rate of 1 per cent for the March quarter came with an upwards revision of 0.1 per cent to 0.5 per cent for the December quarter, emphasising that the upwards trend could be more sustained than would otherwise be suggested by a single quarter’s results.

Booming exports buoy growth

A booming export sector was the biggest contributor to growth followed by government and household consumption, dwelling investment and non-dwelling construction with public investment the only drag on growth.

The stronger economic growth lines up perfectly with the Reserve Bank’s expectations for a stronger year, which it reiterated after keeping official interest rates steady at 1.5 per cent on Tuesday.

The one note of caution about reading too much into one quarter’s numbers is the potential for weakness in household consumption.

Household spending represents around 57 per cent of GDP and could fall away due to several factors including high household debt, tighter bank lending standards, falling house prices and low rates of wage growth and inflation.

There were some signs of a slowdown in consumer spending in some areas.

Spending on insurance, transport, health care and utilities grew the most while spending falls were recorded for alcoholic drinks, cigarettes and eating out.

Mining strong and corporate profits rising fast

Mining numbers were strong with output rising 2.9 per cent due to increases in coal, iron ore and LNG production.

Corporate profits are also rising, up six per cent in the March quarter as the terms of trade also improved.

Retail sales numbers also backed up the improving economy with the important caveat that Australia is prone to spiky economic growth that fails to continue.

Overall retail turnover was up 0.4 per cent to $26.6 billion in April (seasonally adjusted), against expectations of a 0.3 per cent increase.

Spending up on lattes, down on fashion

Cafes, restaurants and take-away improved (up 1.3 per cent) but department stores remained lacklustre, falling 0.9 per cent along with a 0.8 per cent fall in clothing, footwear and personal accessory sales.

Some retailers expect the department store numbers might bounce back due to the unusually hot weather in April which caused some shoppers to put off buying Autumn clothes.

Also potentially improving retail sales are the imposition of GST on purchases under $1000, which has already seen Amazon refuse to send to Australian customers from its massive US and UK online stores.

Interest rates on hold for a record 22 months

Official interest rates have now remained locked on a low 1.5 per cent for a record 22 months, with the Reserve Bank board not giving any hints of a change when announcing their decision on Tuesday.

There has now not been an official interest rate rise since November 2010 and RBA governor Philip Lowe is not hinting at another rise given that housing credit growth had slowed over the past year, especially for investors.

“APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high,” he said.

The RBA Is weighing up a few things in leaving rates steady, with interbank futures not predicting a hike until September 2019.

On the negative side, there is plenty of uncertainty around consumer spending with wages growth and inflation both weak and tightening bank lending standards feeding into the slowing Sydney and Melbourne property markets.

Pushing the case for higher rates are factors including booming infrastructure investment, better non-mining investment, strong export growth and the improving rate of economic growth.

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