The Great Aussie Recession-Free Run Is Looking Shaky Once Again

  • Some economists see risk of contraction in first quarter
  • Disruption from cyclone likely to have negative impact in 2Q

Why We May See the End of Australia's Recession-Free Run

Weak signals from Australia are forcing economists to revisit their first-quarter growth forecasts. Some are even suggesting a contraction.

Home building, net exports and household consumption could be a drag on gross domestic product for the first three months of 2017, according to some estimates. A negative print would raise the specter of recession, especially as a cyclone that ripped through Queensland’s key coal mining region is tipped to subtract from growth in the three months through June.

Sluggish data "all points to growth being only marginally positive at this stage and there’s certainly the risk of a negative quarter," said Shane Oliver, chief economist at AMP Ltd. in Sydney, who now expects first-quarter GDP growth of around 0.2 percent rather than the 0.5-0.6 percent he previously penciled in.

Australia’s enviable track-record in avoiding two straight quarters of contraction since 1991 is on shaky ground. While the economy grew a solid 1.1 percent in the final three months of last year, it was rebounding from a shock 0.5 percent decline. Australia & New Zealand Banking Group Ltd. last week said growth could be just 0.1 percent in the first quarter of this year. That would be an annual rate of 1.5 percent, the lowest since 2009.

While the Reserve Bank of Australia has said holding its benchmark interest rate at a record low 1.5 percent since September is appropriate for “sustainable growth” and meeting its inflation target, a soft GDP number won’t go unnoticed. Oliver says anemic growth in the first half means the risks are still to the downside for borrowing costs, even if the market sees about a 20 percent chance of a cut this year.

A weak number would likely cast further doubt on the government’s growth forecasts, delivered in its annual budget this month, as Prime Minister Malcolm Turnbull’s ruling coalition struggles in the polls. The Treasury is forecasting GDP growth of 1.75 percent in the 12 months through June, accelerating to 3 percent by fiscal 2019.

"We’ve long held the view that sub-trend growth is likely to persist. This idea of a return back to 3 percent-plus growth looks a little ambitious at this stage," said Su-Lin Ong, senior economist at Royal Bank of Canada.

Most observers are waiting for key GDP components such as net exports and business investment to fine tune their forecasts ahead of the June 7 report. Further out, second-quarter growth is tipped to be curbed by Cyclone Debbie, which saw North Queensland coal exports plunge nearly 70 percent in April, according to a Platts report.

Australian Construction Work Done, q/q change

The first official component of first-quarter GDP landed last week: Construction data prompted Commonwealth Bank of Australia’s securities unit and National Australia Bank Ltd. to warn of downside risks to their forecasts and potential for a negative number. Building work fell by 0.7 percent in the first three months, worse than the 0.5 percent decline predicted by economists, with weakness in the residential sector the main drag.

"The pullback in residential construction was certainly surprising and has more serious implications for economic growth," said Savanth Sebastian, senior economist at CBA’s securities unit.

The next piece of the puzzle comes Thursday with private capital spending numbers, which also have the potential to disappoint. Capex has declined in the past four quarters and economists expect it to pick up just 0.5 percent in the first three months as mining investment starts to bottom out.

Trade, Retail

Net exports and household consumption aren’t likely to add much to growth either. Exports rose a modest 2 percent in March, compared with a 5 percent increase in imports, while first-quarter retail sales rose just 0.1 percent and actually fell in March.

One potential bright spot is public spending. Governments at state and federal level are looking to ramp up investment in infrastructure projects, underlined by the government’s May budget pledge to spend A$75 billion ($55.8 billion) on works over the next decade. Yet that might take some time to feed through to bottom-line growth.

The remaining parts of GDP are inventories and company profits on June 5 and net exports on June 6.

Paul Dales, chief economist for Australia and New Zealand at Capital Economics, expects about 0.3 percent growth in the first quarter but thinks that further GDP components may paint a more positive picture. Still, he wouldn’t rule out a technical recession in the first half of this year.

“It’s possible, but at this stage I’m not forecasting it,” he said. “If it did happen, my conclusion would probably be that some of that slowdown is temporary, related to very unusual weather patterns.”

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