Monthly Economic Review: Australia

As Pip Diddy pointed out in his most recent Top Forex Market Movers of the Week, the Aussie was recently experiencing a LOT of bearish pressure from forex traders because of declining iron ore prices, U.S. dollar strength due to the FOMC statement, and weak Australian CPI readings. But what about the other fundamentals? Do they warrant a bearish bias on the Aussie? Well, let’s take a look, shall we?

Growth

Australia’s seasonally adjusted Q2 2015 GDP only grew by 0.2% quarter-on-quarter (+0.9% previous), which was a severe disappointment to forex traders since it missed the forecasted +0.4% and also happens to be the slowest growth rate in two years.

Forex Chart: Australian Quarterly GDP

The main drag was the 3.3% contraction in exports (+8.0% previous), which subtracted 0.7% from GDP growth (+1.1% previous). And the drop in exports was mainly due to a 3.0% slump in mining production (+4.2% previous), with coal mining down 2.7% (+6.2% previous) and iron ore mining down by 0.2% (+3.4% previous).

Fortunately, final consumption expenditure was there (yet again) to save the Australian economy from falling into negative territory, with household expenditure (i.e. consumer spending) growing by 2.5% (+2.6% previous) and contributing +0.3% to GDP (+0.3% previous) growth while general government expenditure (e.g. public health care, public education, national defense, etc.) grew by 4.0% (1.7% previous) and had a positive contribution of 0.4% to GDP (+0.1% previous).

-On an annualized basis, Q2 2015 GDP only grew by 2.0% (+2.5% previous), which is also a two-year low. But on a slightly more upbeat note, it still falls within the lower threshold of the RBA’s 2 to 3 percent forecasted growth… for now at least.

Forex Chart: Australian Annualized GDP

Employment

As I wrote in an earlier article, Australia’s jobless rate held steady at 6.2% for the month of September, but the seasonally adjusted labor force participation rate ticked lower to 64.9% from 65.0%. Meanwhile, employment change printed a net decrease of 5.1K jobs (+18.1K previous) when it was expected to post a net increase of 7.2K jobs, which is the first monthly decline since April of this year.

Forex Chart: Australian Jobless Rate

Even worse, the details of the jobs report show that the decline was due to a loss 13.9K full-time jobs which was partly offset by an 8.9K gain in part-time jobs. That’s pretty bad because full-time jobs usually offer better pay and security, and by extension, higher levels of consumer confidence and consumer spending. No wonder the Aussie was kicked lower across the board when forex traders got their hands on the report!

Consumer Spending & Sentiment

Retail trade rose by 0.4% month-on-month for the month of August, which is a significant improvement over the previous 0.1% decline. However, the annualized reading only printed a 4.30% increase, which is a lower increase than the previous month’s 4.45% and also marks the second consecutive month of slowing growth.

Forex Chart: Australian Retail Sales

Looking forward, things would probably get a bit better since the Westpac-Melbourne Institute’s consumer confidence index advanced by 4.2% to 97.8 after dipping to 93.9 back in September. Despite the climb, the reading is still below the 100.0 neutral mark, so the majority of blokes and sheilas in the land down under ain’t exactly stoked with the economy yet.

Forex Chart: Australian Consumer Confidence

The report attributed the increase to the recent change in leadership, “recent recoveries in the Australian dollar and the sharemaket,” and “a steady improvement in the labour market.” Do note, however, that the survey results were released a day before the labor market reported a stumble, as already discussed above.

Business Sentiment & Conditions

National Australia Bank’s (NAB) business confidence index climbed to 5.0 points for the month of September, up from 1.0 previously. The reasons cited for the improvement were similar to the ones cited for consumer sentiment – a change in leadership and “moderated” financial market volatility.

Forex Chart: Australian Business Confidence

Looking at the sub-components, the business conditions index remained steady at +9.0 while the profitability index dipped from +10.0 to +8.0. On a more upbeat note, the employment index finally climbed to positive territory at +4.0, up from -1.0 previously.

The climb in overall business confidence was not broad-based, however, since the mining and manufacturing sectors were down in the dumps, with the mining sector posting a very pessimistic -14.0. Still, the overall business confidence index was in positive territory due to high optimism in the services industries. The transport/utilities industry, for example, printed a score of +14.0 while personal services presently has +12.0.

Moving on, the Australian Industry Group’s (AIG) performance services index kinda supports the NAB survey since it posted a 52.3, which is still above the 50.0 neutral level and therefore means continued expansion, but it also contradicts the NAB index a bit since it’s lower than the previous reading of 55.6.

Forex Chart: Australian Services PMI

The NAB index and AIG’s manufacturing PMI are at odds as well since AIG reported an improvement for the month of September, with manufacturing PMI currently at 52.1, up from 51.7 previously. The improvement was broad-based as well, with only the employment sub-index showing a slight decline from 51.3 to 50.7.

Forex Chart: Australian Manufacturing PMI

Summary & Conclusion

Overall, Australia’s economy is not doing too bad given the challenging circumstances. But the declining trend in retail sales is kinda worrying since it may negatively affect consumer spending. And that’s very bad since consumer spending has been the backbone of the Australian economy (and most other economies for that matter).

There are also signs of “rebalancing from the resources sector towards non-mining activity,” with the services industries showing the most promise. But for now, forex traders seem to be focused on the faltering mining sector and more downside risks to the future direction of the RBA’s monetary policy.