GDP data points to interest rate increase

Encouraging GDP data has reinforced the RBA’s message that the economy will pick up in the coming year.

The solid second-quarter GDP result was supported by strength in exports and public spending.

Encouraging signs in the latest national accounts data have reinforced the Reserve Bank’s message that the economy will gradually pick up in the coming year, leading to interest rate ­increases.

The economy shrugged off the effects of a cyclone in March to grow strongly in the three months to June, helped by soaring business confidence and higher commodity prices.

Gross domestic product grew 0.8 per cent in the second quarter compared to the first quarter and 1.8 per cent compared to a year earlier.

The dollar fell from US80.19c to US79.74c as the data came in slightly below consensus estimates of 0.9 per cent growth for the quarter and 1.9 per cent growth for the year.

Still, it was a strong result compared with first-quarter growth of 0.3 per cent on-quarter.

It also marked Australia’s 26th year of economic growth since the last recession in the early 1990s.

The upbeat data reflect rising business confidence in Australia, which has played out amid much stronger employment growth and rising non-mining investment. Indeed, private business investment has increased for three consecutive quarters, the first time this has happened since 2003.

“There are certainly some positive signs in the data, including for business investment and government investment,” said Riki Polygenis, head of Australian economics at NAB.

“This fits with the RBA’s upbeat view on the economic outlook, is consistent with the next move in rates being up rather than down, and raises the risk that the RBA may hike sooner than we currently expect in 2019.”

Scott Morrison seized on the positive signs for private-sector investment and said the upward momentum in the economy raised the prospect of a smaller fiscal deficit than the government had forecast in the May budget.

“I anticipate that based on these (GDP) figures and other data that has come that we will achieve a better-than-the-budgeted outcome,” the Treasurer said.

It also supports the optimistic outlook offered by the RBA this week.

While keeping official interest rates unchanged at a record low 1.5 per cent for the 13th month in a row, the RBA said recent data had been “consistent with the bank’s expectation that growth in the Australian economy will gradually pick up over the coming year”.

Speaking in Brisbane on Tuesday, RBA governor Philip Lowe said he was encouraged by recent strength in investment and full-time jobs growth, something the RBA has been anticipating for some time. He said inflation had “troughed” and was likely to gradually increase in the next couple of years.

The solid second-quarter GDP result was supported by strength in exports and public spending, led by infrastructure construction. The price of iron ore — Australia’s biggest export — has been higher than expected in recent months, fanning ­business confidence and generating added income for resource companies.

Still, lingering pessimism among consumers continues to cloud an otherwise sunny outlook for the economy, as record household debt and slow wages growth are keeping Australians’ cash in their wallets.

“On the surface, today’s numbers are solid,” CBA senior economist Gareth Aird said.

“The output side of the economy looks relatively healthy and in our view, we should see some further strength in real GDP growth over the second half of 2017.

“But there is more to the economy than just output. Weak household income growth continues to weigh on the consumer. And flat real wages growth indicates that workers are not sharing the productivity dividend that is evident in positive GDP per capita growth. As a result, the disparity between consumer and business confidence is likely to persist.”

A further complication is coming from the dollar, which recently hit its highest level in more than two years, potentially weighing on exports, economic growth and inflation.

NAB’s Ms Polygenis said there was cause for “a degree of caution” because the outlook for key pillars of growth such as wages and consumer spending were “clouded” amid structural changes in the labour market and high household debt levels, the exchange rate had risen, and there was a risk that the dwelling construction cycle may be peaking earlier than expected.

“In this environment, the inflation-targeting central bank will need to be more confident that wages and underlying inflation will pick up in a sustainable fashion,” she said. “Any emerging risks in the housing market are likely to be addressed through non-interest rate channels, at least for now.”

However, HSBC chief economist Paul Bloxham said the key point was that business investment was now lifting as the drag from the mining investment downturn diminished, non-mining investment recovered and infrastructure investment remained strong.

“We see growth picking up further over the second half as export volumes continue to rebound and business investment gains momentum,” Mr Bloxham said.

“For household demand to be sustained, though, there also needs to be a lift in household incomes and wages, which is not yet apparent but, in our view, is due to arrive soon.”

Additional reporting: James Glynn