This is roughly double consensus expectations. 

The key drivers of the upside surprise were household consumption which grew by a very strong 1.6% and a 19.7% rise in new engineering construction, which is mainly mining related. 

These numbers are great news and highlight that Australia is much stronger than comparable developed countries. Eg while Australia grew 4.3% over the year to the March quarter, the Euro-zone was flat, the UK contracted 0.1%, the US grew 2% and Japan grew 2.7%. 

However, our assessment is that it would be very dangerous to assume that this sort of growth will continue. Sure the mining boom has a way to go, but more timely data for April and May suggest that retailing, housing related activity, manufacturers and services sectors are continuing to struggle suggesting a return to softer sub trend growth in the current quarter and beyond. 

Its also worth noting that much of the strength in consumer spending related to strong gains in normally volatile services related items such as health, transport and education which are likely to fall back in subsequent quarters. 

In other areas the house hold savings rate remained high at 9.3%, productivity growth was 1.9% in the quarter and 3.9% over the year and state final demand growth continued to highlight the two speed economy with WA up 14.5% over the last year and Northern Territory up 16.9%, but NSW growing just 1.9% and Tasmania contracting 0.8%. Additionally the terms of trade has fallen for two quarter in a row and measures of inflation were low and falling (eg the household consumption deflator is up just 1.4% year on year). 

With March quarter growth likely to prove to be a bit of an aberration (just as the March quarter contraction in GDP was last year), real gross national income softening and inflation low our view remains that the RBA has more to do in terms of cutting interest rates. We see the cash rate falling to around 2.75% by year end.

7 June 2012

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