Today saw the release of the GDP data for the second quarter. Markets had been expecting a figure around +0.4-+0.6% and the result came in at +0.5% q/q for an annual increase over the financial year 2015-16 of +2.9% and +3.3% y/y. Being broadly in line with expectations the Forex market response was muted with barely any movement in the A$ after the release.
Items to note included the GDP Implied Price Deflator (IPD) which saw its largest increase (+0.8% q/q) since Q3 2011 and might suggest that the price effects of a weaker A$ are starting to be felt. Certainly domestic price pressures are not a problem with the Gross National Expenditure IPD remaining subdued at just +1.3% for the year. Household Consumption (the main component of GDP) was up just 0.4% q/q and contributed just 0.2 ppts to growth (this is the weakest contribution for 3 years). Public Fixed Capital Formation added 0.7 ppts to GDP growth which is the strongest contribution from that source since Q3 2013, although it appears this may be due to some volatile defence expenditure.
The story from Queensland is one of a recovery. State Final Demand (which does not account for the state’s massive exports) rose 0.7% q/q which is the best performance in 3 years. Interestingly, given the talk about the slowdown in Private Investment, this sector was up 0.9% for the quarter with investment in machinery and equipment (which accounts for 23% of Private Fixed Capital) jumping 10.4% q/q. Public sector Fixed Capital also grew strongly up 6.8% q/q which helped the Public sector grow 1.9% q/q. The net result from this renewed strength is that State Final Demand was down just 1.2% for the year 2015-16 and up 0.4% y/y; this is the best result since the end of 2014 although it still falls a little short of the 2016-17 Budget forecast of a 1.0% decline.
On the basis of these figures Private Investment for the 2015-16 year has fallen 13.2% rather than the 11% decline the State Budget had penciled in. This 2.2% undershoot would remove approximately 0.4% from Gross State Product (GSP) growth. However, this is a much better result than we had been expecting based on previous data; we had been looking at a 1% shortfall in GSP caused by Private Investment weakness (see here). That now looks overly pessimistic and it may well be that better-than-forecast Net Exports could make up that shortfall and actually help the economy reach the 3.5% growth target. Exports data for the March quarter does indeed suggest better-than-forecast growth which could add up to 0.5% to the GSP growth total. Unfortunately we will not get the Gross State Product data for this quarter until November.