Key insights from the week that was.
Australian GDP surprised to the upside in Q1 2022, gaining 0.8% to be 3.3% higher than a year ago. As expected, household consumption was a key support, total spending rising 1.5% in the three months to March (4.0%yr). Most notable in the detail for this sector was that discretionary spending rose 4.3% despite disruptions related to the omicron variant of COVID-19 and heavy flooding on the east coast. Also significant for the immediate outlook is that households chose to finance some of their purchases through a reduction in the savings rate from historically-elevated levels – showing confidence in their individual prospects and the economy more broadly.
Of the other sectors, public spending reported a very healthy gain of 2.6% (8.0%yr) and business investment beat expectations (1.4%; 3.6%yr). Meanwhile, despite a large pipeline of work, residential construction contracted for a second consecutive quarter (-1.0;-1.3%yr), highlighting the impact of labour and construction input shortages being seen the world over. For a full sectoral and state breakdown of the release, see our bulletin.
Providing more detail on the housing market, this week CoreLogic data confirmed that the anticipated house price correction has begun, a 0.3% decline seen across the eight major cities in May. Responding to the uncertainty, turnover continues to decline, down 12% nationally and 25-30% in Sydney and Melbourne – admittedly from high levels late last year. Dwelling approvals also continue to fall, down 2.4% in April to be 32% lower than a year ago.
International trade was also a focus for Australia this week. In Q1, Australia’s current account recorded a 12th consecutive surplus, though at 1.3% of GDP, it was materially inside of Q2 2021’s peak surplus of 4.1%. Thereafter, the April trade balance printed ahead of expectations at $10.5bn as service exports jumped 10% in the month to be 13% higher than end-2021. Note however, the level at April is still some 39% below that seen prior to the pandemic. With Australia’s border now open, further strong gains for tourism and student arrivals are expected over the coming year. Westpac continues to expect the RBA to respond to the strength in Australia’s economy and inflation risks by raising the cash rate by 40bps at their June meeting, then to a year-end rate of 1.75% and a cycle peak of 2.25% at May 2023.
Switching from real economic activity to financial transactions, the Q1 financial account again reported strong demand for Australian financial and real assets. Inbound and outbound direct investment was strong and focused on new investment decisions. Portfolio flows out of Australia also showed a bias towards long-term growth opportunities, with 61% of the Q1 gross portfolio outflow dedicated to equity investments (over the 12 months to March, the share was materially higher, circa 90%). A higher proportion of the gross portfolio inflow continues to target debt assets (50% in Q1 and 80% over the year to March). In time, the greater share of equity investment for Australian investors abroad should lead to a higher net return for Australia, particularly if capital gains are left to compound.
Moving offshore, the calendar has been relatively light to date, with the key international release of the week (the US employment report) still to come. The focus of markets has therefore been hawkish guidance from the Bank of Canada as they delivered another 50bp increase in the Bank Rate to 1.50%. An upside surprise for the US ISM manufacturing survey in May along with comments through the week from FOMC members (which continued to signal an intent to move back to neutral by end-2022) allowed the hawkish mood to transfer across to the US, the 10-year rising back above 2.90% mid-week having tested down to around 2.70% last week. We remain of the view that the FOMC will deliver 50bp increases in June and July before slowing the pace of rate hikes back to 25bp increments from September and halting the hiking cycle at 2.625% come December. By this time, in our view, US growth will have slowed to trend and inflation more than halved from its early-2022 peak (on a 6-month annualised basis).
Finally to China. At the beginning of the week, we detailed our expectations for China’s recovery from the recent COVID-zero lockdowns. Our view remains that momentum will quickly return and have a strong long-term foundation, built on quality investment, robust trade flows and, in time, a resurgent consumer. In our view, growth near authorities 5.5% target is still achievable in 2022 as long as the Q2 outcome is positive and there are no other significant outbreaks of the virus. The official May PMI outcomes were constructive for our view this week, the services PMI rebounding more than 5pts in the month and the manufacturing PMI back near 50 – this is despite the ongoing impact of the Shanghai and Beijing lockdowns and associated logistic bottlenecks through the month.
