The latest GDP data were a little below expectations at 0.6%QoQ and 2.5%YoY. Most importantly, this is below where the RBA is looking for growth, with the risks over the next 12 months to the downside. This means more easing, lower bond yields and a weaker Aussie dollar.
While growth of 2.5%YoY is by no means disastrous, the challenge is to stop it slipping further. This remains all the more difficult given the RBA has already lowered interest rates quite alot, while fiscal policy remains focussed on reducing deficits.
It is also increasingly difficult as it is becoming clearer that the investment cycle will soon be much larger drag on growth, with it unlikely that the other components of growth will fully offset this decline.
The chart on the left shows my expectations for growth 12 months ahead. The big challenge is that the light blue business investment component, which is already fading as a growth driver, will likely fall significantly. Net exports should continue to contribute strongly, although not any more so than present. Housing investment is also projected to add 0.7ppt, but this isn't enough to stop growth from falling from the current rate of 2.5% to ~1.8%. This is below the RBA's expectation of 2-2.5% for next year.
Looking at the 1Q13 data shows that the challenge of managing weaker business investment has already begun. Private business investment was a 1ppt drag on quarterly growth when adjusting for a large private to public transfer last quarter. The negative momentum in the capex data suggests this will only get worse.
Net exports helped fill this gap, although a big driver of this was via weaker imports, which points to poor domestic demand.
Consumption activity has been rock steady despite an uptick in unemployment, but dwelling investment has so far disappointed. This should rise in the next 6-12 months given the recent jump in housing finance and building approvals.
Government investment was actually a little stronger in the quarter, but is a drag on yearly growth. This will only get larger given the push for fiscal consolidation from both political parties with an election looming.
So far the picture isn't too bad, but 1Q also saw significant destocking, which was a surprisingly large drag on activity. In particular, inventories at a wholesale level were drawn very sharply, while mining also destocked to support exports.
