Australian economy expands strongly in Q2 on public and housing spending

The Australian economy grew robustly in the second quarter, implying that the transition towards non-mining growth drivers is underway. The strong growth in the quarter was mainly driven by public and housing spending. The Australian GDP grew 0.5 percent in sequential terms in the second quarter after the 1 percent growth in the prior quarter. However, the growth rate came in slightly below the consensus forecast of 0.6 percent.

The investment in mining is declining at a faster pace. It fell 15 percent in the second quarter. However, the drag on growth is expected to be at or close to its peak, and stabilizing commodity prices signify that the hit to national income is fading, said ANZ in a research note.

With the ongoing strong rebound in the non-mining states, new non-mining investment is picking up. Housing continues to be the reason of the recovery and is expected to continue to add to the economic growth in 2016 given the record backlog of work. Consumer spending has been expanding strongly; however the decline in the second quarter is surprising and concerning. Furthermore, growth in services exports that has mainly driven the non-mining recovery, has stepped down, implying that the Australian dollar is not giving much support to demand.

But, public spending has expanded on both the consumption and investment front. This might imply that the ongoing program of infrastructure spending would underpin public investment growth in 2016 and 2017, stated ANZ.

While the Australian economic growth continues to be strong, the Reserve Bank of Australia is expected to remain focused on low inflation where cost pressures continue to be soft. Underlying inflation, measured by the consumer deflator ex-food and energy, rebounded in the second quarter; however it continues to be weak compared with 2015.

Meanwhile, non-farm wages were up again in the second quarter, rising 0.3 percent in the second quarter. Currently, annual growth is running at 1.5 percent, an increase from 0.5 percent in the fourth quarter of 2015. However, the nominal unit labor costs dropped 0.2 percent in the quarter and 0.3 percent year-on-year. This indicates towards ongoing downward pressure on inflation. This weakness is expected to keep the central bank’s easing bias intake in spite of strong economic growth, stated ANZ.