The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, December 7, 2011

UBS: "Q3 GDP...above trend, as private demand jumps on capex & consumption"

This is frankly humiliating for anyone claiming the Aussie economy is "soft" or growing below trend: flood-affected real GDP in Q1 revised up to -0.7% (from originally -1.2%); Q2 revised up to +1.4%; and Q3 prints +1.0%. Significantly, household consumption is growing at around 4.4% per annum in real terms on the basis of the last two quarters of data. From UBS today:

*GDP printed 1.0% in Q311, above expectations on the day (mkt +0.8%)...abstracting from the flood-impacted Q1 drop of 0.7% q/q (revised up from -0.9%), the annualised pace of growth over the past two quarters is now 5% (well above trend). Key to this has been the strength in business capex, which has jumped about 13% in Q3 (after a flat Q2, led by engineering work), while consumption improved to an above trend pace (+1.2% q/q and 3.8% y/y, worth 0.7%pts to growth in Q3). In contrast, housing investment has been soft (+0.9% q/q, but -3% y/y), and trade continue to subtract from growth, while the sharp drag on growth in Q3 from inventories and public demand will likely add to growth over coming quarters. Resource rich States show real demand of 12% (against a 5% national average).

* For the quarter, domestic demand jumped 2.1% (after 0.6%), lifting the y/y pace to an above trend 4.6%. This masks an even greater spike in private demand, which rose 3.5% (after 0.7%), sending the y/y pace to a well above trend 6.7%. In contrast (again), public demand fell an unusually sharp 2.5% (after +0.3%), with the y/y pace dropping to -2.0% y/y. Ex-mining, GDP was still up 0.7% q/q, the same if we also exclude the associated sector covering engineers etc.

* When we dig into the components of private demand, we find the long awaited capex boom explains much of the rise (+13% q/q, 2.0%pts to GDP)., with consumption also making a strong contribution (+1.2% q/q and 0.7%pts). For capex, non-resi construction surged 25% q/q (+35% y/y), while equipment investment also rose strongly by 5.7% (14% y/y). Elsewhere, housing investment was modest (+0.9% q/q, 0.0%pts). The historically high saving rate drifted up to 10.1% from 9.1% (after a flood payment impacted 10.8% in Q1).

Implications: As was the case last quarter, today's data shows an economy expanding solidly above trend, with more than expected strength across capex and non-retail consumption (while the retail spend is also now improving). While real demand growth is 4.6% y/y - a little above its 4% trend - private demand is surging (7% y/y), with only a surprisingly weak public spend in Q3 (-2% y/y) avoiding an historic rise in total demand.

Looking ahead, with the strength in capex unlikely to change much, the outlook for the RBA cash rate depends on the balance of exports - and how much they slow into 1H12 on a weaker global growth - against how much the consumer and housing sectors respond to a less hawkish RBA and lower lending rates (UBSe -25bp in February).