The Australian economy is in better shape than the Reserve Bank, the federal government and the rest of the country believed before the December quarter National Accounts were issued yesterday.
Although the accounts showed strong growth in household consumption (a no no for the RBA), big imports and a big foreign debt (another no no for the country as a whole), they also showed some signs of a slowing in growth in key areas.
The upshot was a belief that the RBA remains alert and concerned, but perhaps no rate rises for a couple of months, even more.
And this has been backed up by a smaller than expected rise in building approvals in January, to go with the stalling of retail sales, although unemployment did fall to a 33 year low in the month.
But unemployment is a lagging indicator and news of the slower growth in approvals and retail sales adds impact of a downturn in consumer confidence in the month and which continued into February.
Economists at Goldman Sachs JBWere and Merrill Lynch crunched the GDP numbers and have discovered some good news.
Wages are not rising as fast as everyone, including the RBA and business economists, feared.
When the very strong March quarter figures disappear from the 12 month figures when the current quarter’s accounts are issued in May, domestic growth will fall, profits are back growing faster than wages, and the slowdown in household consumption is real.
For example Merrill Lynch said:
"The supercharged household income growth also moderated in the quarter with the compensation of employees rising 0.8%, down from an average 1.9% a quarter growth over the past two years. Gross household disposable income was flat in the quarter, with a rundown in savings used to support consumption growth in the quarter.
"With corporate gross operating surplus rising solidly in the quarter (+3.5% for non-financial corporates), the profit share of national income rose 0.4%pts to 26.9%, arresting the decline over the previous two quarters (see Chart 6).
"The Q4 GDP data confirmed that the economy finished 2007 very strongly. Domestic demand was particularly strong, growing well in excess of the economy’s productive capacity. Sequential growth momentum (measured on a six-monthly annualised basis) has, however been slowing, with the exception of household consumption. Consumer spending appears to be weakening significantly in the March quarter."
And Goldman Sachs said in part:
"The GDP report remains consistent with our view that we are at the peak of the rates cycle. The combination of a sequential slowdown in activity, base effects dropping out and much tighter financial conditions suggests that our projected slow down for the Australian economy remains firmly on track.
"Our forecasts for 2.5% GDP growth in 2008 and 2.7% in 2009 remain unchanged. Additionally, national accounts measures of wages that previously concerned the RBA now look far more benign.
"Notably while GDP (+3.9%yoy) and domestic demand (+5.7%yoy) both still look disconcertingly strong, the momentum looks more palatable on a 6-month annualised basis, with growth slowing from a 4.2% pace in 3Q07 to a 3.6% pace in 4Q07. Looking more closely, it is clear that a very strong March quarter 2007 print for private demand growth of 2.8%qoq will ‘fall out’ of the annual calculation upon the next GDP release.
"In other words, assuming our forecast of another 0.6%qoq print for GDP in the March quarter 2008 is met, headline GDP will have slowed from 3.9%yoy to 3.2% (or 2.9% at a 6-month annualised pace). The trend slowdown will be more apparent in the non-farm economy, which has already slowed from a 4.8%yoy pace in the June quarter 2007 to 4.0%yoy in the December quarter and we believe is on track for a 3.0% pace in 1Q08.
"Obviously this would be a far more palatable outcome for the RBA, but since it occurs before the impact of the aggressive tightening in financial conditions has yet to fully impact demand, the slowdown in demand will be more extended.
"Average non-farm compensation of employees (the wages measure the RBA shifted focus to in the most recent Statement on Monetary Policy) slowed from a 6.1%yoy pace (11-year high) to a far more reasonable 4.6%yoy pace in the December quarter.
"Our preferred measure of consumer prices, core (non-energy) private consumption prices rose 2.3%yoy, which is down from a peak of 2.9%yoy at the end of 2006. While fruit prices likely pulled this reading down somewhat it provides a separate reading on price pressures that are less worrying than the CPI.
"Private consumption growth finished 2007 very strong, rising 5.0%yoy, but has started 2008 with a whimper if the flat retail sales provide a reliable guide.
"In summary, the strength in the annual pace of the GDP data belies the sequential slowing in the Australian economy that has been evident since mid-2007. The combination of base effects dropping out and much tighter financial conditions suggests that our projected slow down for the Australian economy remains firmly on track."
So looking at the smaller-than-expected rise in building approvals in January, economists cautioned that should not be interpreted as a sign higher interest rates are starting to bite.
But with the small 0.1% rise in December after November’s rate rise (now revised to a fall of 11.3% instead of 11.6%) and the lower than expected rise in January, there’s something happening, especially as the Australian Bureau of Statistics also revised downwards the retail sales figures for November and December.
Australian building approvals rose 1.9% to 13,166 units in January, seasonally adjusted, from an upwardly revised 12,920 units in December, the Australian Bureau of Statistics said on Thursday.
Economists had forecast approvals to rise
