A change of Government, even one born out of the upheaval of a marked shift in voting allegiance towards minor parties and...
A change of Government, even one born out of the upheaval of a marked shift in voting allegiance towards minor parties and independents, will make minimal difference to Australia’s economic outlook in the near-term. The new Government is in with a majority in the lower house it seems. It promised nothing before the election that will alter Australian economic prospects materially in the near-term.
Essentially, Australia is growing more strongly than most other advanced economies and is managing that growth outperformance with less inflation than most others. Australia’s comparatively positive economic momentum in the near term will not be altered by a change of government. Even when the new Government does start to legislate change according to the “small target” list of changes promised ahead of the election the impact on economic growth prospects will be small.
It is perhaps an inconvenient truth for the incoming Government that it is inheriting an economy that is in good shape. On Wednesday 1st June, the ABS will release Australia’s Q1 GDP growth and it is likely to show real growth of at least 1% q-o-q. That compares with quarterly GDP growth in Q1 that slipped backwards in the US, and Japan and rose only 0.3% q-o-q in the European Union.
Moreover, Australia has strong growth momentum in Q2, not least from a near fully employed workforce. The April labour force report released last week showed total employment up 4,000 (full-time employment was up 92,400) and the unemployment rate at 3.9%, the lowest reading in 48 years. The strong labour market will continue to underpin household spending, one key support for Australia’s strong economic growth.
Australian households are facing higher cost-of-living challenges but one-time payments and additional tax rebates from the previous Government provide some near-term offset and past build-up of household savings through the pandemic provide ability to keep spending, even if wage growth is not keeping pace with inflation for the time being.
In Q1, real retail spending rose by 1.2% q-o-q. A first look at how retail spending is going early in Q2 will be provided by April retail sales out on Friday. The market consensus forecast is that retail sales rose around 1.0% m-o-m, still robust annualising above 10% y-o-y!
Apart from household spending, business investment spending looks firm as well. The Q1 private new capital expenditure report is out on Thursday and is expected to show a rise of around 1.5% q-o-q after a 1.1% increase in Q4. Business surveys have been showing a lift in businesses expecting to increase capital spending. Business profits have been rising strongly, especially for resource companies benefiting from what has been a problem in many countries overseas, sharply higher commodity prices.
In past cycles of rising commodity prices, the Australian dollar exchange rate has usually risen too, tempering some of the profit gain for Australian commodity exporters. This time, because of investors reacting to uncertainties in the world by buying US dollars, the Australian dollar exchange rate has been comparatively soft allowing almost full flow of much higher export commodity prices denominated in US dollars to feed through to higher Australian company profits.
Australia’s resource companies might be expected to add substantially to the lift in Australian business investment spending that is already in train.
While Australian economic growth prospects look strong for the most-part, one potential soft-patch down the track is housing activity. Housing has been exceptionally strong around Australia for the past two years, but the first signs of a softer turn are showing in Sydney and Melbourne.
The capping out of the house price boom is essentially a response to policy measures by APRA and the RBA that have started to limit the amounts that homebuyers can borrow and added to mortgage servicing costs. APRA’s higher interest servicing buffers on loans from more than a year ago, combined with the RBA abandoning its control of the 3-year bond yield at 0.10% late last year setting the scene for sharp lift in bank’s fixed-rate mortgage interest rates and then this month the start hiking the cash rate have all combined to temper home purchase demand.
The policy squeeze on housing demand is set to continue, partly alleviated perhaps if the new Government gets its low-middle income home buyer scheme up after its first Budget planned for October. It is reasonable to expect that the softness in the Sydney and Melbourne housing markets continues and extends slowly to other capital cities and the regions. Housing activity is likely to be a growing detractor of economic growth later this year, but not enough of a detractor to destroy otherwise strong growth in other sectors.
One reason to expect the housing slowdown to be more wilt than collapse is what we spoke about last week. The RBA is in the enviable position of normalising its cash rate slowly. Wage growth is comparatively low and slow. The Q1 wage price index released last week rose 0.7% q-o-q, 2.4% y-o-y, compared with 0.7% q-o-q, 2.3% y-o-y in Q4 2021. Wage growth may lift faster later this year with key wage claims that will be decided soon, but annual wage growth will not match inflation this side of 2023 providing the RBA with the opportunity to hike in customary 25bps steps (not the 50 bps steps common in higher inflation countries such as Canada, New Zealand, the US and UK) and take pauses occasionally.
All told, Australian economic growth is strong and looks like staying strong the rest of this year at least. Australian inflation is high, but not as high as elsewhere and looks manageable on less policy response than elsewhere. The change of Government will not alter Australia’s economic outlook in the near-term.