US outperforms, Australia wallows?

The US economy continues to outperform other global economies, and a 4.2%saar real GDP growth rate is undeniably strong. Elsewhere, activity in other major advanced economies has stuttered, at least during the first half of 2018. As a result, the narrative has moved toward the US economy decoupling from these economies – synchronous global growth has become increasingly fractured.

But is the story any different for Australia? If we were to report GDP growth in the standard US convention, which annualises quarterly growth rates, Australian real GDP growth expanded 4.7%saar in the March quarter, decelerating to 3.5%yoy in the June quarter. Adopting the Australian convention, the US economy expanded 2.9%yoy in the June quarter, compared with 3.4%yoy for Australia. The trajectories of growth may be somewhat different going forward, as there is a lot of fiscal stimulus still in the US system, but as it stands, in terms of headline growth numbers, Australia has outperformed the US materially through 2018 to date.

Global: Australia & US GDP comparison
Australia’s headline performance can be misleading


Source: IFM Investors, ABS, BEA,Macrobond

Despite this, the local perceptions of the two economies could hardly be any more different. Economists in the US are becoming concerned about the length of the cycle, the economy overheating, supply side constraints, inflation breaking out as wage growth improves, and the US Federal Reserve (Fed) potentially having to raise policy rates more aggressively than it already expects. Many market participants in the US are preoccupied looking for signs the economy is overheating. In Australia, economists are generally encouraged by economic, and particularly labour market, outcomes. But spare capacity remains: consumers are relatively cautious, there are downside risks to house prices, wages growth is only showing tentative signs of picking up, and inflation is nowhere near the Reserves Bank of Australia’s (RBA) target. A similar assessment prevails amongst non-economists as well: US consumer confidence is at 18-year highs and business confidence is not far behind. In Australia, the former is muted and the latter, although elevated, is off peaks seen in 2017.