Countervailing forces likely to impact Australia’s economic growth momentum in 2016

Australia's Q4 GDP grew 0.6%, surpassing market median expectations of 0.4% growth. Moreover, the country's Q3 economic growth was revised up from 0.9% to 1.1%. Australia's annual growth reached 3% in Q4, as compared with Q3's growth of 2.7% and up from 2.2% at the end of 2014. This is the strongest annual rise since a one-off in March 2014. 2015's annual GDP growth at 3% is slightly above trend, which is judged to be 2.75%. This is a change from recent experience, when GDP growth has been slightly lower than tend.

Meanwhile, hours worked grew 1.2% q/q in Q4 and 3.3% y/y, on line with Labor Force Survey's strong results. Meanwhile, declining terms of trade have pressurised the incomes at national level, including the household sector. Australia's nominal GDP grew 0.4% in Q4, while the annual growth is still weak at 2.4%.

The terms of trade declined sharply further by 3.2% q/q and 12% y/y, negatively affecting the national income, including flow-on effects to wages. Meanwhile, consumer spending surprised on the upside, growing 0.8% in Q4, after the Q3 figure was revised upwardly to 0.9% from 0.7%. Annual consumer spending is currently at 2.9%.

It is uncertain that the economic growth momentum of the past half year will continue in 2016 as offsetting forces carry on impacting the Australian economy. A sharp decline in consumer saving flows is 'funding' consumer spending, raising certain question regarding to what extent it will be sustained.

Building activity in 2016 is likely to moderate as commercial building and home building crests turns down. Moreover, the global backdrop is becoming ambiguous. The Reserve Bank of Australia has stated that global growth is "slightly lower than earlier expected" and that financial markets have again demonstrated heightened volatility.