GDP is the official measure of economic growth in Australia.
The December quarter saw strong contributions from Net Exports as
commodity volumes rose and capital imports fell. Household
consumption rose by 0.8% and Public Investment increased by
1.2% m/m Jan'14 6.20% y/y
Retail trade is at a 4 year high and now well above the long
New Orders PMI
50.0 Feb'14 Manufacturing
The latest survey indicates that manufacturing activity is
improving while services are flat. (A reading above 50 means that
new orders are improving, a reading below 50 means that new orders
Modest improvement expected
-3.6% q/q Dec'13
Result is indicative of the slowdown in mining investment and
Modest improvement expected
Over 80,000 full time jobs were created in February, the
largest monthly gain since August 1991. The unemployment rate
remained unmoved however due to an increase in the participation
rate (number of people re-entering the workforce).
Inflation & Interest
Inflation 0.8% q/q Dec'13 2.7% y/y
Official Cash Rate 2.50% Mar'14
Underlying inflation (as measured by the trimmed mean) is
running at around 2.6% p.a. The recent increase in inflation and
strengthening trend in retail sales, home prices and building
approvals is likely to put upward pressure on inflation and hence
increase the likelihood of an interest rate rise in coming
We expect the official cash rate to rise by at least
The AUD rose over the quarter as data confirmed that the economy
is improving. Conflicting forces means that the short term outlook
will be difficult to predict. The strengthening economy and
potential for interest rates to rise modestly will put upward
pressure on the dollar. On the other hand, the gradual withdrawal
of monetary stimulus in the United States and uncertainty regarding
the extent and timing of a slowdown in China will exert downward
pressure on the dollar.
Nominal devaluation expected
Economic growth of 2.8% over the year is now just below the
longer term trend of 3.0%. Most economic indicators released since
31 December suggest that the growth trajectory continues to
improve. Historically low domestic interest rates have encouraged
borrowers to invest in property that in turn has led to a surge in
house prices, building approvals and residential construction
activity. The improvement in household wealth has finally enticed
consumers to spend again which has boosted the profits of retailers
and in particular those exposed to the housing sector. In addition,
although the mining investment boom has ended, the resultant
increase in volumes has provided a significant contrition to net
These are all positive developments but as noted in our January
commentary, the current growth resurgence is based on relatively
weak fundamentals and is unlikely to last over the medium term for
a number of reasons:
The current housing boom is unsustainable. Cheap credit that
has spiked asset values will not last forever and household debt
levels are already among the highest in the world.
Manufacturing remains broadly uncompetitive despite the fall in
Demand for Australian resources will inevitably slow as China
eventually deals with the vast overinvestment in residential
property and infrastructure, which is set to trigger a wave of bad
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