Chief economist update: Another five minutes of sunshine?

Australians all, let us rejoice! Our economy is in pole position.

The Australian Bureau of Statistics' (ABS) National Accounts report showed the economy expanded by 3.1% in the year to the March quarter, accelerating from the 2.4% in the previous quarter.

This is higher than market expectations for a 2.8% expansion and (using the same year-on-year measure) pushes the Australian economy ahead of the US (2.8%), the Eurozone (2.5%), the UK (1.2%) and Japan (1%). It's also the fastest growth rate since the June 2016 quarter (3.3%) when the domestic economy similarly outperformed its peers.

To be sure, these are pretty numbers that'll sure put a smile on Federal Treasurer Scott Morrison's face and vindicate the Reserve Bank of Australia's (RBA) "central forecast for GDP growth to pick up, to average a bit above 3% in 2018 and 2019."

Financial Standard's recently-published "Good Economics Guide" explains that total economic output is derived from the sum of consumption (C), investment (I), government spending (G) and exports minus imports (X-Y).

The details of the December quarter show positive contributions to growth from household consumption (+0.2 pps), private investment (+0.2%), government spending (+0.2) and net exports (+0.4).

Very good - all major GDP components have produced positive contributions to March quarter growth. However, dig deeper and you'll find some nasties.

It all starts with a capital C. The strong positive contribution from household consumption in the December 2017 quarter (0.6 pps) was reduced to a third (0.2) in three-months to March. The ABS explained that "this was driven by rises in non-discretionary components such as insurance and other financial services (0.7%), food (0.5%), and electricity, gas and other fuels (2.3%). There were falls in hotels, cafes and restaurants (-1.8%) and alcoholic beverages (-2%)."

In other words, households were spending only on essentials. With household disposable income down to 2.8% in March from 2.9% in December (and wages stagnant), they are dipping into their savings to buy these essentials - the household savings ratio declined to 2.1% in March from 2.3% in December.

Household consumption is the biggest component of the economy, accounting for around 60% of GDP. The Budget tax cuts should help alleviate weak household finances and perhaps, stir stronger consumption (if not used to pay off high household debt).

I. Private investment increased by 0.5% over the March quarter, not strong enough to fully compensate for the 0.9% decline in the previous quarter. The quarterly change in the trend estimates show persistent moderation in growth from 1.1% in the June 2017 quarter to 0.2% in March.

G. Government spending has also slowed. Government consumption growth eased to 1.6% in the March quarter from 2.2% in the previous quarter. Government investment fell by 2% in March, more than reversing the 1.7% increase in the last quarter of 2017.

X-Y. This is the biggest contributor to March quarter GDP growth. Exports of goods and services rebounded by 2.4% in March after the previous quarter's 1.5% decline while growth in imports slowed to 0.5% in the March quarter from 1.6% in December.

The US may have exempted Australia from its tariffs but if Trump's protectionist policies escalate into a global trade war, particularly with China - Australia's biggest export client - the consequent growth slowdown in our trading partners would also impact on the domestic economy.

All else being equal, the RBA should remain on hold through to end-2018 as the central bank try to shift economic growth to a sustainably higher growth path

If you want to read further, below is a snippet from Financial Standard's "Good Economics Guide" explaining the implications of the GDP data on investment.

Implications:

Investors follow the size of the GDP and GDP growth because it indicates if the economy is expanding or contracting thereby helping them gauge future economic and therefore business prospects. For example, stock market investors like to see positive economic growth because a strong and expanding economy translates into higher corporate earnings, corporate profits which leads to increasing stock market prices.

Property investors also like to see positive economic growth because it means individuals and businesses are more likely to purchase houses and investment properties during times of expansion when jobs are more secure and incomes are growing.

Conversely, fixed interest investors generally consider economic expansion as negative for bonds because it can indicate inflation may be going up which might force interest rates to increase. When interest rates go up bond investors can suffer because the interest yields on their bonds may not be high enough to exceed expected inflation and this will lead to their bonds capital value decreasing.

By tracking GDP growth investors will come to understand the economic backdrop that underpins the performance of their portfolio. The Australian Bureau of Statistic's GDP report contains a treasure-trove of information that not only paints an image of the overall economy, but also informs investors about important trends within the bigger macro-economic picture.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: USGDPHouseholdABSAustralian Bureau of StatisticFinancial StandardGood Economics GuideAustralian Bureau of StatisticsAustraliansBudgetChinaFederal Treasurer Scott MorrisonG. GovernmentI. PrivateJapanNational AccountsReserve Bank of AustraliaTrumpUK
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