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What lies ahead for Australia’s economy?

Australia’s economy gained some momentum in the September quarter, with GDP up 0.9% for the quarter and 2.5% over the year.
The quarterly jump in GDP is the biggest rise in over three years. Which ever way you cut this result, it is good news for the economy.

In looking at the makeup of the economic growth, it is broadly as one would expect with interest rates at record lows and the Australia dollar down a massive 40 cents or so from the peak level in 2011. Household consumption spending was up a solid 2.9% over the past year while dwelling investment, which includes spending on alterations and additions, as well as the construction of new houses, is up a strong 10.3%.

Net exports surged adding 1.5 percentage points to quarterly GDP growth which means that while the price for many of our exports is in the dumps, we are selling ever increasing tonnages or volumes of goods and services. Of course business investment fell sharply, but this was concentrated in the mining sector.

The stronger GDP fits with the better news recorded recently in the jobs market since the middle of 2015. There was some concern that the jobs data were ‘wrong’, given the economy appeared to be soft, but with GDP expanding at a decent clip, there are less reasons to doubt the reliability of the labour market data. If the economic growth momentum continues at the current pace, the peak in the unemployment rate for this cycle has probably passed.

The bigger question than the GDP result is what is ahead for the economy?

2016 looks like being a year of stronger economic growth. The low interest rates still in place and a very low Aussie dollar, the key drivers of the economy are clearly very positive. This alone will underpin a decent economic expansion. To be sure there appears to be some offset to these positive drivers from the recent renewed decline in commodity prices, but the negative impact of these declines is close to running its course with global economic growth tilting higher. Commodity prices have already fallen a lot meaning further sharp and importantly protracted lower levels for commodity prices is unlikely.

This is especially the case with the signs of decent rates of economic growth being registered in the global economy.
If business investment, currently very weak, can find a floor during 2016 as the non-mining sector picks up steam, real GDP growth could easily reach – and exceed – 3% by the end of 2016.

For interest rates, it means interest rate cuts are very unlikely. Frankly, there is no need for lower interest rates if the economy is on the up.

The RBA yesterday seemed quietly pleased with the momentum of the economy, albeit with inflation a little too low for their comfort.
Which begs the question if interest rates are not going down, when will they be going up? Clearly, it is too early to be seriously suggesting that the RBA will be lifting interest rates any time soon.

But if we see another two quarters where GDP growth is 0.9% or so, if the unemployment rate dips towards 5.5% and the inflation rate by mid 2016 is on the rise, in the latter part of 2016 the RBA just might be wanting to take away the super easy monetary policy settings with a small lift in interest rates.