Australia: Country Economic Forecast: 19 Apr 2013

Soft Q1 GDP data from China, the most important destination for Australian exports, has stoked worries about economic momentum in the region but, paradoxically, monthly indicators for Australia point to a stronger-than-expected Q1. Exports rose a robust 3.3% on the month in value terms in February. While some of this was driven by a recovery in iron ore prices, non-resource exports grew more rapidly than resources, primarily on higher volumes. At the same time, households seem to be becoming less cautious. Retail sales rose strongly in January and February and confidence rose sharply, although the latter fell back somewhat in April. The labour market has been on a roller-coaster in the past two months, with a staggering 74,000 jobs created in February - the largest increase in 12 years - followed by a pullback of 36,000 jobs in March. But the underlying trend points to strength. The data suggest that interest rate reductions since late 2011 are having their desired effect, so we do not expect another rate cut in spite of the Chinese hiccup. The improvement in the Q1 data has lifted our 2013 GDP forecast slightly to 2.6%, with 3.3% growth expected in 2014 as consumer confidence continues to improve and households begin to spend their considerable savings.