Autumn arrives, but it’s sunshine for the economy

Brendan Rynne, Partner, Chief Economist

Has Australia’s economy started to turn the corner? There is increasingly positive news.

Today’s national accounts, as released by the ABS, shows unexpectedly high growth of 1.1% for the last quarter of 2016.  In the three months to the end of December the Australian economy witnessed a significant increase in household consumption and investment in the housing sector.

Annual growth was 2.4%, again, well up on expectations.

Some key points:

  • Net exports made a strong contribution, while many state governments spent a lot more on capital expenditure, with Victoria, Queensland, South Australia and Tasmania all with double-digit increases.
  • Government capex spend as a whole was up 8% quarter on quarter, and 12% year-on-year. On a sector basis, growth in agricultural production has been massive, recording a 24% improvement in 2017 over 2016.
  • Other sectors also experienced strong growth over the past 12 months, including iron ore (+9%), coal (+6%), professional services (+7%), and finance / insurance (+4%).
  • The 1.1% GDP growth is across the board – 0.5% came from household consumption, 0.1% from investment, 0.3% from government and 0.2% from net exports.

Today’s strong figures follow other encouraging indicators. Yesterday’s Balance of Payments results showed our net export position has increased markedly due to the turnaround in commodity prices.

Strong company results in the current reporting season has seen business profits surging to a level far higher than a year ago.  Profits before tax grew an incredible 470% in the mining industry in the final quarter of 2016, again as a direct result of the improvements in the global price of iron ore and coal.

Even excluding mining from these profit calculations, the remaining sectors in the Australian economy also grew a substantial 20% over the quarter.  Importantly, we have seen a slight uptick in profit margins across most industries in the December quarter, with most sectors in the economy now earning margins at or above their 10-year sector averages.

So there are clearly some encouraging signs. But it may not be advisable to unfurl the flags just yet.

It should be remembered that the strong December results come on the back of negative GDP growth in the September quarter 2016, a result which was dragged down by a significant reduction in public sector consumption and investment expenditure.

KPMG Economics latest forecast, also released today, predicts steady growth to be maintained during the remainder of FY17 and into FY18 and beyond, although those poor September quarter results will act as a drag on the annual figure until it rolls out of the annual growth calculation in September 2018.  This growth is anticipated to stimulate employment, with the unemployment rate anticipated to be about 5.4% by the end of the FY17.

Gross fixed capital formation rebounded strongly during 2016 Q4, with both private and public sectors recording an increase in activity in the December quarter (up 1.5% and 7.7% respectively).

Australia’s Terms of Trade has started to lift as a consequence of the rise in commodity prices, up 15.6% since the beginning of 2016.  KPMG expect this strength is likely to be short lived, with growth of less than 0.5% forecast for calendar year 2017, and then steadily declining over the next few years.

Australia’s net debt position is expected to worsen, rising to $317 billion this year, and progressively increasing to be approximately $364 billion by the end of FY20.  A consequence of this increase in net debt is a rise in net interest payments made by the government, up from $12.3 billion in FY17 to $14.7 billion in FY20.

Despite this poor fiscal outlook the Treasurer is still predicting the budget will return to surplus in FY21; a prospect KPMG believes is unlikely unless significant reforms to government receipts, expenditures or both occurs. Unfortunately the adverse domestic political environment militates against that.

Looking further afield, the world economy grew at its slowest rate for the year to December 2016 since 2009, hindered by geopolitical uncertainty and concerns about ‘closing borders’ and increasing protectionism.

Global financial markets have reacted generally positively towards the election of US President Trump, with bond yields increasing, the USD appreciating and stock market values rising.  This reaction is essentially  in response to expectations of expansionary fiscal policies, including tax cuts for individuals and businesses, additional spending in infrastructure assets, deregulation of various government controls, and the adoption of inward looking policy platforms, especially for trade, growth and migration.

But my KPMG tax colleagues have already warned that the prospect of a so-called ‘Destination Tax’ mooted by the President, will not help to preserve the company tax base here in Australia – rather such taxes are likely to diminish global trade.

The United Kingdom is still experiencing very subdued growth on the back of insecurity of households and business, following the Brexit vote.  Growth of 0.6% for the final 2016 quarter was achieved through higher consumption activity, but this is likely to be short lived as real incomes fall over the coming months due to currency depreciation induced inflation. In continental Europe, political uncertainty ahead of elections in France and Germany will add to patchy economic performance.

Closer to home, in Asia, Japan has had some progress in improving its economic performance; and experienced three consecutive quarters of positive economic growth in 2016. While in China growth of 6.7% in 2016 obscures a number of structural problems within the Chinese economy, including very high debt-to-GDP levels and overcapacity within various heavy industries, particularly due to the loss making state-owned enterprises operating within the sectors.

Both at home and overseas, the picture remains uncertain. Welcome to the new normal.

KPMG Quarterly Economic Outlook: Global and Australian Forecasts – March 2017

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