I was very surprised to see that real gross domestic product expanded a solid 3.4 per cent in the year to June 30, well above market expectations for annual growth of around 2.8 per cent.
Much of the reason for the strong number – which showed the economy is running well above potential of around 2.75 per cent – comes down to upward revisions of around 0.5 percentage points of prior quarters, mainly around residential building activity and government spending.
And when you delve into the numbers, conditions are not quite as strong as they sound for consumers in particular.
For one, wages growth adjusted for inflation is running at around 0.3 per cent – people’s incomes are not reflecting the overall strength of the economy. The data, released earlier this month, also showed the household savings rate has fallen to just 1 per cent as people have to pullback how much they save to keep spending amid weak wages growth.
The pressures were borne out last week in The Westpac Melbourne Institute Index of Consumer Sentiment, which declined 3 per cent to 100.5 in September – the weakest sentiment read since November last year and only just above the 100 level indicating sentiment just remains in positive territory.
Increases in mortgage interest rates, political instability and household budget pressures are taking a toll.
So while we lifted our growth forecast for 2018 to 3.3 per cent following the strong GDP report, the profile of the economy remains one that will slow into 2019 to 2.7 per cent.
In contrast, the Reserve Bank appears increasingly comfortable with their forecasts that growth will remain above potential, as reiterated yesterday in minutes to its September board meeting.
But I’m more cautious around the implications of falling house prices, the associated negative wealth effect people feel, global economic risks, low wages growth and political uncertainty. Yesterday, the Westpac–Melbourne Institute Leading Index signaled a slowing in growth momentum as we move through the second half of 2018 and into 2019.
We continue to expect that the RBA will keep the overnight cash rate on hold at 1.5 per cent through to at least the end of 2020.
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