Australia: Q1 GDP uncomfortably close to zero; should policy respond? – ANZ

The analysis team at ANZ explains that Australia’s Q1 GDP is shaping up as a weak print and ANZ’s preliminary estimate is for a rise of just 0.1% q/q and are wary of the potential downside risks to their already soft estimate.

Key Quotes

“A weak GDP print stands in complete contrast to the strength of business sentiment and the better labour market. This provides support for the view the weakness will be temporary. But the extent of the Q2 rebound will be tempered by Cyclone Debbie. More importantly for the outlook, we do think household consumption growth has slowed to a level more in line with soft income growth. This pulls down our outlook for growth beyond the first half of this year.”

“A very soft Q1 print and the likely softer path for growth will inevitably lead to the question of whether monetary and fiscal policy should respond. If the reasons for the Q1 weakness look more permanent than temporary then on the fiscal side we think the Government should let the automatic stabilisers work, look at bringing forward infrastructure spending and consider productivity enhancing structural measures. We don’t think there will be a strong case for discretionary fiscal easing.”

“As for monetary policy, we think the initial response of the RBA will be to downplay weakness given the global backdrop, robust business sentiment and the improving labour market. But if business sentiment and the labour market falter then the pressure for RBA action will build. We think the first cab off the rank will be more rate cuts, but the Bank is getting close to the point where unconventional measures may need to be considered.”

“We emphasise that we think it will take more than a weak Q1 GDP outcome for the RBA to get to this point. And we think there are good reasons to hold on to the view that the economy has more underlying strength than the Q1 GDP report will reveal. It seems the case, however, that the growth outlook looks weaker than it did even a month ago. For this reason we have to consider that further RBA policy easing, including possible unconventional measures, might come back to the table.”