Daily Commentary BY THE CURVE TEAM –

Surprise Driver of GDP Bounce

3rd of June, 2021

Australian GDP grew strongly over Q1 as expected, but had a surprising factor driving it.

GDP was up 1.8% for the quarter, leaving it 1.1% higher than last year. This marks the official return of GDP to levels higher than pre covid and puts the economy officially into an expansionary phase.

Consumption has dominated growth in the last two quarters, as consumers spent big after being in lockdown and off the back of government spending. This quarter, consumption contributed 0.7% points to growth being up 1.2%, but in Q4 consumption was up 4.5%.

It leaves consumption flat compared to last year, but household savings remains high at 11.6%, only a 0.6% point drop from Q4. This means there is still scope for consumption to drive growth, especially on services which can generate recurring spending.

Investment was the predominant driver of growth in Q1. It was up 5.3% and contributed 0.9% points to growth.

Dwelling investment had a disproportionate impact, up 6.4% for the quarter and 7.9% on last year. Business investment was also strong, rising 3.6% but remains 1.4% below last year.

The fact that dwelling investment had such a large impact is testament to the homebuilder scheme by the federal government. It also points to the ongoing contribution from the government in GDP growth, with public spending up 5.1% on last year.

A transition away from this has clearly begun though, with government spending up only 0.2% in Q1 compared to 1% in Q4. The economy will rely on businesses to continue to invest and consumers to tap into their savings if the transition to private sector led growth is to be smooth.

Today, more data is released, with trade balance and retail sales for April.

Josh Stewart

Director - Interest Rate Markets