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Aussie GDP rally unlikely to move wages needle as Fed eyes a rate hike

Peter Warnes  |  08 Jun 2018Text size  Decrease  Increase  |  
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The Australian economy bounced back to life in the March quarter (1Q18) with GDP growing at 1% and year-on-year growth of 3.1%. This was above economists’ consensus expectations of 0.9% and 2.9%, respectively. The December quarter (4Q17) growth was revised upwards from 0.4% to 0.5%. This is heartening news, welcomed by the market and the Reserve Bank (RBA).

While RBA governor Philip Lowe would have been confidentially advised of the figures earlier, there was not a peep or a tweet before the 11.30am release to the market. Thankfully, some do know how to behave responsibly.

Clearly what happens for the remainder of 2018 is more important, but let’s make the most of the good news. It will not change the RBA’s stance on interest rates.

The resources sector was a meaningful contributor, driving a strong recovery in net exports and providing stimulus to company profits. After a $2.3bn net exports deficit sliced 0.5% off 4Q17’s growth as coal and iron ore volumes were affected by adverse weather, they bounced back and added 0.5% to 1Q18’s growth. The continued rise of LNG exports from Queensland facilities iced the cake. The sustainability of the support from the sector depends on the economic growth of our largest trading partner and whether our strained relationship with authorities affects demand for the bulks, iron ore and coal.

LNG exports will add to 3Q18 growth as prices have a four-month lag of the Brent marker, which rose from US$68 to US$80 through 2Q18 and is currently US$75. Gladstone facilities are near capacity and the LNG tail wind will abate as volume peaks and spot price will be a more important determinant of the contribution to net exports.

Public sector infrastructure spending and business investment continued to support overall growth.

Stronger GDP growth revived hopes for wages, but some caution is warranted. Resources and infrastructure are capital intensive, not labour intensive like retail, hospitality and caring. The wages needle is unlikely to move much. Household consumption was weak, growing by 0.3%, equalling the weakest quarter since 2012, with essentials including food, utilities and insurance pre-eminent. The household savings rate fell to 2.1%, supporting consumption and is at its lowest level since 2007. With house prices falling and disposable income growth below trend, a change in consumer behaviour could result in a meaningful slowing in consumption growth, which would more than offset the positives from net exports and investment.

Earlier, separate data revealed company profits grew by 5.9% in the quarter, with mining profits up 10.9% and non-mining a more pedestrian 3.4%. Again, these were better-than-expected but the equity market has these numbers already baked in to relatively elevated prices. At over 16, the market price earnings multiple (PEM) is well above average and the industrials even more expensive at 18, near 30% above their long-term average. With non-mining earnings growth closer to mid-single digits, the price-to-earnings growth ratio (PEG) is over 3 and unsustainable in the long-term. This, at a time when interest rates are also at unsustainably low levels. These are signals which must be recognised before rather than after the event.

The U.S. Federal Reserve will lift rates next week

The better-than-expected US May jobs report, with 223,000 non-farm jobs created, almost guarantees the Federal Open Market Committee (FOMC) will raise the federal funds rate by 25 points at its 12-13 June meeting. It will take the official benchmark’s target range to 1.75%-2.0%. The expected increase will represent the seventh 25-point tightening since December 2015, from the then historically low range of 0%-0.25%. The market is pricing in one more hike for 2018 in December. But there are a growing number, including Capital Economics, expecting two hikes before the curtain falls on 2018.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

 


Your feedback on this week’s Overview is always welcome. Send your comments to YMW@morningstar.com. We’d love to hear from you.

 


© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is Morningstar's head of equities research.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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