Australian Economy GDP should bounce back above 3% in 2010

GDP running at weak 0.5%pa in QIII 2009. Australia’s favourable outcomes flowed from
good management and good luck.

Real GDP rose by 0.2% in QIII 2009, putting annual growth at 0.5%. Growth is weak. But Australia has outperformed the very gloomy expectations of earlier in the year. Australia’s favourable growth and employment outcomes are, in our view, due to a combination of good luck and good management.

The good management came from large RBA interest rate cuts and the rapid distribution of $20bn in cash and first home buyers’ grants to low and middle income households in late 2008 and early 2009. The handouts acted as a significant cushion to households expecting a re-run of the early 1990s recession. The rebound in the business and consumer sentiment surveys reflects the relatively strong balance sheet position of households and businesses because of the handouts and the 50 year low in mortgage rates. Confidence bounced back when the flow of data indicated that Australia had escaped with only a slowdown and not a recession. The good luck in economic terms came from the strong population growth of the past 5 years which helped keep housing demand relatively buoyant.

Housing sales and new construction have lifted through 2009 as variable mortgage rates fell to the 5.8% level, a 50 year low. Export volumes held up particularly well as China kept buying after commodity prices fell in 2008. In contrast Australia’s imports dropped as buyers anticipated a major recession and cut inventories accordingly. 2010 growth should be near trend as consumer confidence and jobs lift. Business investment should also recover helped by a lift in energy projects.

The peak in the unemployment rate at 5.8% is a welcome development for the 2010 growth outlook. It is part of the reason for the strong lift in consumer confidence over the past few months. Employers have retained their workforces by reducing hours worked rather than outright shedding. As jobs lift in 2010 we expect consumer spending to move back to normal growth rates.

Higher residential construction across the nation should also feed into firmer jobs and spending outcomes. The RBA’s move to “normalise” interest rate settings should not be a barrier to the lift in residential construction. Non-residential construction activity should lift significantly through 2010. Spending on mining and infrastructure should help offset the expected weakness in new commercial and industrial construction. The Federal Government’s infrastructure funds will add about 2 percentage points to GDP over the next few years.

Recent announcements on the LNG projects in WA and Queensland have the potential to lift annual LNG investment from about 0.5% of GDP (or $6bn) currently to, possibly, 2.5% (or $36bn) in 2015. GDP growth is headed back to its trend rate of 3.25% in 2010.

Source Commonwealth Bank Research