MNI DATA ANALYSIS: Australia GDP Solid, H'hold Outlook Unsure

--Household Savings Ratio Lowest Since December 2007

By Sophia Rodrigues

     SYDNEY (MNI) - Australia's better-than-expected second quarter GDP growth

was driven mainly by households, although sustainability is in doubt given the

dip into savings to support expenditure amid slowing income growth.

     The GDP data supports the Reserve Bank of Australia's guidance for the next

move in the cash rate to be up, yet much depends on the outlook for household

consumption, which remains the key uncertainty for growth and inflation

prospects.

     Data published by the Australian Bureau of Statistics Wednesday showed the

economy grew 0.9% q/q in Q2, faster than MNI's median forecast for a 0.7% rise.

There were significant upward revisions to previous quarterly growth data,

resulted in y/y GDP accelerating to 3.4%, well above trend growth of around 3%.

     The RBA said Tuesday the economy likely grew at an above trend pace in the

first half but the strong growth of 1.1% q/q in Q1 and 0.9% in Q2 means the

outcome could even better their expectation.

     --SAVINGS DRAWDOWN

     In the latest quarter, household consumption was the main driver to growth,

adding 0.4 percentage points to the 0.9% q/q growth. It was the same for y/y

growth, with household consumption contributing 1.7 points.

     However, amid slowing income growth, households are dipping into savings to

fund spending, raising question marks over how long this trend can continue. The

data showed the household savings ratio fell to 1.0% in Q2, the lowest since

December 2007.

     Adding to the worry is an easing in housing market conditions, with the

national house price index down for eleven straight months. The RBA has long

highlighted the concern that although households didn't boost consumption

solidly when house prices were rising, there is a risk they could slow

consumption sharply when housing prices are falling.

     There is little to suggest this is happening already, but the longer

housing prices remain weak or start declining at a faster rate, and the longer

wage growth takes to accelerate, the greater the chance RBA concerns come to

fruition.

     Income measures in the latest GDP data were weak. The GDP data showed

nominal GDP slowed in Q2, rising just 1.0% q/q compared with a 2.2% rise in Q1

and average compensation per employee rose just 0.1% q/q, slowing from a 0.6%

rise in Q1. 

     Non-farm compensation was relatively strong at +0.7% but even this was the

slowest growth in seven quarters. Average non-farm compensation per employee

rose just 0.1% q/q, a pace last seen in Q2 2017.

     --GDP DRIVERS AHEAD

     Alongside households, government spending was a contributor to growth in

Q2, adding 0.2 percentage point to q/q growth and a full point to y/y growth.

     Net exports contributed just 0.1 point to q/q growth and was a significant

detractor to y/y growth, taking off 0.7 of a point. The RBA's expectation is

that net exports would make contribution to growth, mainly due to a rise in LNG

exports.

     Dwelling construction added 0.1 of a point to q/q growth and 0.2 to y/y

growth, but is not expected to contribute to growth in coming quarters.

     Total capital formation made no contribution to q/q growth, although it

added 0.8 of a point to y/y data, with expectations it will support growth in

the coming period.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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