Australia: Growth is set to pick up - HSBC

The resources sector is finally starting to stabilise, after five years of falling mining investment and commodity prices acting as a drag on Australia’s growth and as a result of this, and continued solid conditions in other sectors of the economy, timely indicators of conditions suggest that overall growth is set to pick up pace, according to analysts at HSBC.

Key Quotes

“We expect GDP growth to pick up from 1.8% y-o-y in Q2 to an above trend pace of over 3% y-o-y by Q4 2017, and for the momentum to continue into 2018.”

“Timely indicators show improving conditions in the business sector. Surveyed business conditions have been around decade-highs recently and firms are reporting that capacity utilisation is rising. Jobs growth has picked up strongly, with employment growth running at 2.7% y-o-y. This has been sufficient to drive the unemployment rate to trend lower. The business surveys and ABS Capex report also suggest that private sector non-mining business investment intentions are picking up.  At the same time, growth in infrastructure investment has accelerated, largely driven by state government urban transport network expansions and upgrades.”

“Corporate profitability has also improved, which has lifted nominal GDP growth to 6.3% y-o-y in Q2 2017, up from growth of 3.4% y-o-y a year earlier. This has been partly driven by improving mining sector profitability, reflecting both higher commodity prices and significant cost cutting across the industry. Non-mining corporate profitability has also improved, particularly supported by growth in the services sectors.”

“However, the lift in nominal growth has so far been limited to improving corporate profitability. Wage and household disposable income growth has been subdued. We expect this to change soon. A look at history reveals that rising corporate profitability typically flows through to some lift in wages growth, albeit with a lag. Combined with a larger lift in the minimum wage this year than last year, a tightening labour market and stronger economic growth, we are forecasting that wages growth will edge higher in the second half of 2017 and running into 2018.”

“We continue to forecast GDP growth to lift from 2.5% in 2017 to 3.2% in 2018 and to run at 2.8% in 2019. We expect CPI inflation to rise from 2.0% in 2017 to 2.6% in 2018 and 2019. As a result of the expected pick-up in growth and lift in inflation we expect the RBA to start to normalise its policy rate setting soon, with a cash rate hike expected in early 2018.”