Australia GDP Rises Despite Disinflation Woes

Australia saw GDP growth accelerated to a 0.9% rise in the first quarter of 2015, above expectations, although incomes have stagnated and economists fear the country is facing a disinflationary trend that is unfamiliar to the country.

Australia saw GDP growth accelerated to a 0.9% rise in the first quarter of 2015, above expectations, although incomes have stagnated and economists fear the country is facing a disinflationary trend that is unfamiliar to the country.

Mining and export-driven Australia beat expectations of a 0.7% gain, with mining exports driving most of the economic gains. Exports grew by 5% in the first quarter, a strong rise despite a fall in nominal prices as commodities were hit by weakening demand from emerging markets, especially China, which is Australia’s biggest partner. Some economists noted that, when discounting the mining exports, non-mining activity in Australia is significantly weaker, and could point to a near-recessionary trend.

However, the Australian government has dismissed worries that demand is weakening in Asia or that Australia is threatened by a slowdown in China. Australia’s Federal Treasurer Joe Hockey argued the economic figures were strong, noting growth in services demand. “Significantly, services exports are up 8 per cent over the past year, in line with rising demand from Asia. This is the fastest growth since 2007,” he said at a press conference, adding that East Asian consumers are turning to Australia more than ever. “There is growth in areas such as tourism, education and professional services, which are set to become increasingly important drivers of growth in the future and will be supported by our free-trade agreements with China, Japan and Korea,” he added.

The economy rose by 2.3% from the same period a year ago, a deceleration from a long-term trend of growth above 3%.

Worrying Income Trends

Some analysts in Australia are calling the growth trend “worrying” because GDP growth, while better than expected, is being unevenly distributed, with many dependent on mining feeling that they are facing a recession. Many Australian firms have pulled back on investing in mining operations, including hiring activities, on a fear that China’s slower growth will weaken demand in the future.

A result of this is weaker wage growth. Real gross domestic income fell by 0.2% from the same period a year ago. Disposable household income, which accounts for falling prices for consumable goods, was flat on a year-over-year basis.

This has resulted in weak and weakening domestic demand. Consumption rose by 0.5% in the first quarter, with business investment falling across industries. Professional, scientific, and technical services contracted, indicating weak demand for high-paying white collar jobs. Additionally, mining, engineering, and construction all saw declines.

In total, mining investment fell by 14% on a quarter-over-quarter basis, while manufacturing fell 9%. Non-mining investment fell 4.8%.

Economists worry that stagnant disposable incomes may create a vicious cycle in which consumers feel less confident in their economic situation, thereby pulling back spending and creating a savings glut. That, in turn, could cause businesses to pull back on investing and cause growth in employment and incomes to fall even further.