Remarkably, Australian GDP Growth Turned Positive in Q1

Australia's aggressive policy response to the global financial crisis probably helped to boost GDP in the first quarter. Although the economy down-under likely won't grow strongly over the next few quarters, Australia probably has avoided the very deep recessions that most other advanced economies are experiencing.

Australia Apparently Escapes Plunge That Befell Others

Real GDP in Australia rose at an annualized rate of 1.5 percent in the first quarter of 2009 relative to the previous quarter. Not only was the outturn much better than the 1 percent decline the consensus forecast had anticipated, but it also stands in stark contrast to the nosedive that GDP took in most other advanced economies. What's so special about Australia?

The breakdown of GDP into its underlying demand components shows that real personal spending grew 2.3 percent in the first quarter. The government announced a fiscal stimulus package last autumn, which it increased in February, that includes higher expenditures on infrastructure and cash payments to workers. Some of the rise in consumer spending in the first quarter probably is attributable to the stimulus. Cash payments were made in March and April, and retail sales in April were up 0.3 percent relative to March. Thus, some of the stimulus has carried over to the second quarter. In addition, the increased infrastructure spending does not appear to have hit the economy yet as public investment spending fell 2.5 percent in the first quarter. Therefore, the overall economy should be supported in the quarters ahead as the infrastructure spending enters the pipeline. However, private investment spending plunged nearly 20 percent in the first quarter, and a quick turnaround does not seem likely until businesses are convinced that the recovery is sustainable. In that regard, growth in the rest of the world may need to strengthen significantly until businesses down-under start to ramp up capex.

Speaking of the rest of the world, net exports provided a significant boost to Australian real GDP in the first quarter. The 25 percent drop in real imports of goods and services make some sense in light of the pronounced weakness in business fixed investment spending. However, we are at a loss to explain the 11 percent rise in Australia's exports that apparently occurred in the first quarter due to the extreme weakness in global economic activity earlier this year. Perhaps the rise is nothing more than a statistical fluke that will be paid back in the second quarter.

However, given the carnage in the global economy over the past two quarters the relative resilience of the Australian economy is a pleasant surprise. Policymakers down-under have been very aggressive. Not only did the fiscal authorities move quickly to support the economy, but the central bank has slashed its policy rate by 425 bps since last autumn. Australian growth probably won't bounce back sharply in the quarters ahead. Not only will some of the stimulus fade, but exports could weaken while global economic activity remains weak. That said, Australia has probably avoided the very deep recessions that most other advanced economies are experiencing.

Wachovia Corporation
http://www.wachovia.com

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