After an unexpectedly rosy December quarter in 2016, the national accounts for Q1 2017 have brought the economy back in line with forecasts.
The more modest figures, outlined in KPMG Economics latest Quarterly Economic Outlook better reflect underlying economic conditions affecting Australia in the short and medium term.
The first quarter of 2017 has yielded just 0.3 percent GDP growth compared to 1.1 percent in the fourth quarter of 2016. More tellingly, year-on-year growth of just 1.7 percent in Q1 is also the lowest figure seen since September of 2009.
While bad weather is in part to blame for the slowdown, deeper structural factors also contributed and are expected to keep growth subdued in the coming years.
Among these factors is weak household and government consumption growth as well as an 11 percent fall in business investment in 2016 and expected 7 percent fall in FY17. The decline in mining investment has swamped aggregate investment, and will continue to do so for next 18 months. Overall, investment contributed 0.4 percentage points towards GDP.
These figures have had little impact on our forecast of 1.7 percent real GDP growth in FY17. We expect this will increase to mid-2 percent growth in FY18, before slowly edging towards the high 2 percent range by FY22.
What about jobs?
Q1 has also seen a continued structural shift in the labour market with an increasing number of people employed on a part-time and casual basis. May 2017 was an exception to this trend with full time employment increasing by 52,063 and part-time employment decrease of 10,105.
Overall, the unemployment rate fell 0.2 percentage points to 5.5 percent (seasonally adjusted) in Q1 2017, with some spare capacity still lingering in the labour market (specifically with regard to ‘under-employment’). We continue to forecast an unemployment rate of 5.9 percent in FY17, remaining ‘sticky’ at around 6 percent in the medium term.
Labour costs have stayed subdued despite higher employment figures, with public sector wage growth outstripping private sector growth. Seasonally adjusted public sector wages grew 0.6 percent quarter on quarter (q/q) in Q1 2017 2.4 percent year on year (y/y) compared to 0.5 percent q/q (1.8 percent y/y) in the private sector.
We expect wage growth rates to match our economic growth forecast over the coming years after bottoming in FY17.
The low labour cost growth has kept inflation constrained at 2.1 percent y/yin the first quarter with underlying inflation hovering around 1.9 percent on a trimmed mean basis. We expect this to rise through the next few months as Cyclone Debbie’s effect on food prices begins to be felt. The RBA’s accommodative cash rate of 1.5 percent will also encourage a rise in inflation towards the 2.5 percent medium-term target.
Australian exports are expected to remain strong over the year supported by healthy demand for commodities in resources and energy as well as a competitive Aussie dollar. KPMG Economics’ forecasts have the AUD/USD exchange rate settling around the USD 0.75c level for the immediate future
Regrettably, we believe 2017 will see limited fiscal reform in Australia with effective corporate tax rates and effective personal income tax rates kept the same as in FY16. Government spending will also be maintained at levels forecast in the recent MYEFO statement.
The reluctance of governments to commit to tax reform could cause some backlash when housing sales cool. The recent NSW State Budget showed that even the nation’s strongest economy is largely propped up by stamp duty revenues. The need for tax reform at both federal and state levels cannot be ignored for much longer.
Housing affordability, by contrast, is one area in which governments have been willing to take a number of steps. One of the Federal Government’s main initiatives is a tax concession for first home buyers within a superannuation scheme. The proposal would see voluntary contribution up to $15,000 per year attract concessional tax treatment.
While we expect this to improve housing affordability in Australia, it is unlikely to provide much short term relief in Sydney and Melbourne, where the problem is most acute. In our recent Housing affordability report, KPMG Economics found these markets to be overvalued by 14 percent and 8 percent respectively. As prices ease back towards their true value in the coming years, state governments may take an unwelcome hit to stamp duty revenues.
States & territories
Turning to the states and territories, state government debt has been growing at a faster pace than either Commonwealth Government or local government debt. Tasmania’s public sector debt increased the most from FY15 to FY16 at 19 percent followed by South Australia at 12 percent. Queensland and NSW recorded the least growth in public debt at 4 percent and 8 percent respectively.
On the ability to pay, Tasmania remains in a very distressed state. Combined net debt and unfunded superannuation liabilities of Tasmania’s State and Local Government stood at about 41 percent of the GSP at the end of FY16, an increase from 35.6 percent at the end of FY15. As with tax reform, this situation cannot go unaddressed for too long.
The national accounts from Q1 2017 are largely on track with KPMG’s forecast. We should see growth increase next year with improved economic conditions and reduced uncertainty domestically and internationally.