With more than 25 years without a recession, the Australian economy grew at a 1.7 percent year-over-year pace in Q1, notes the analysis team at Wells Fargo.
“Gains were nearly broad based with declines in exports and residential construction weighing on overall growth. Some of the quarterly softness was due to Cyclone Debbie earlier in the year, but we expect economic activity to improve in Q2. Business investment marginally picked up in Q1, after being a drag on growth for the past nine out of 11 quarters.”
“That said, consumption, wages and household savings remain a concern for the economy. Consumer spending rose a meager 0.5 percent over the quarter, down from the 0.9 percent pace in Q4. Retail sales excluding inflation cooled over the quarter as well. The slowdown in domestic demand is linked to weak wage growth. Stagnant wage growth has led households to tap into their savings, as such the savings rates lowered to 4.7 percent in Q1—2 percentage points below year-ago levels. However, job growth picked up in May with full-time employment accounting for all of the gain and apply much needed upward pressure to wages.”
“As expected, the Reserve Bank of Australia (RBA) held its cash rate at 1.50 percent for the tenth sequential month. However, the RBA is concerned that lethargic wage growth could constrain household spending. Current monetary policy has also not been favorable for the currency which remains under pressure from lower commodity prices. We expect the RBA to hold rates until 2018, as economic fundamentals do not warrant a rate hike, at present.”
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