Daily Commentary BY THE CURVE TEAM –

GDP Concerns Fade

6th of June, 2017

Fears of a very weak or even negative read on GDP for the first quarter faded yesterday following the release of more partial indicators. There are still more indicators to be released today but expectations are that we should skate through with another positive quarter of growth. While the calculation of GDP should remain positive, the data is telling a different story.

Net exports, which has underpinned growth in recent years, is expected to print negative later today following weather related disruptions in Q1, but inventories has stepped up to fill the void. Inventories grew by 1.2% in Q1, more than double the 0.4% expected and will contribute 0.4% to growth when it is released tomorrow.

Inventories can be seen one of two ways. Businesses could be building up inventories to cope with rising demand. Alternatively, inventories could be building up due to lack of demand. Given the softness in retail figures so far this year along with export interruptions, it is more likely to be the latter.

Company profits released yesterday should also help growth. Profits were up 6% to be nearly 40% higher over the year. The increase was heavily influenced by mining profits, which continue to benefit from the pick up in commodity prices over the previous 12 months.

Unfortunately, unlike we have seen in the past, this pick up in national income is not filtering through to the rest of the economy, especially consumers. Another reading on wages, derived from yesterday’s data, explains why consumer perceptions of their own finances continues to fall. Wages growth for the quarter was only 0.3% with the annual rate a paltry 0.9%. This does not bode well for consumption over the coming quarters.

The final GDP partials will be out today, which will arm economists with as much information as possible to narrow down their forecasts for tomorrow. As it stands, the market is currently expecting an increase in GDP of 0.3% for the quarter, which will see the annual rate slip from 2.4% to 1.6%.

However the key will be what the RBA thinks. We will get a pretty clear indication on their assessment of growth and the outlook later today following their monthly board meeting. While no change is expected, the market will be closely watching what Governor Lowe has to say in light of recent data developments.

David Flanagan

Director - Interest Rate Markets