Monthly Economic Review: Australia

G’day, forex mates! The Aussie’s recent forex price action has been dictated mostly by the prevailing risk sentiment and reports from or about China. But what about Australia’s underlying fundamentals? And since Australia just released its CPI readings earlier today, I thought that now would be a good opportunity to give y’all a quick roundup on Australia’s economic situation.

Employment

I noted in my Forex Trading Guide for Australia’s December jobs report that leading indicators were hinting at a possible upside surprise. Well, we did get an upside surprise since the December jobs report revealed that employment only saw a net loss of 1.0K jobs when a net loss of 10.0K jobs was expected (+74.9K previous).

The details of the report make it even better since the net loss in jobs was due to a loss of 18.5K part-time positions, but this was partly offset by the 17.6K gain in full-time positions. Also, as I mentioned in a more in-depth article, 2015 marked the strongest year of employment growth for Australia since 2006, which is great.

Anyhow, the seasonally-adjusted jobless rate held steady at 5.8%, which is the lowest reading since May 2014. The only disappointing thing about the jobs report is that labor force participation rate slid down to 65.1% from 65.3%, which implies that some Australians just gave up on looking for jobs.

Forex Snapshot: Australian Jobless Rate

Australian Jobless Rate

Business Sentiment & Conditions

National Australia Bank’s (NAB) Monthly Business Survey for the December period reported that the business confidence index printed a reading of 3 points, 2 points down from the previous month. It’s still above zero, so business confidence is still positive, which is good.

Forex Snapshot: Australian Business Confidence

Australian Business Confidence

The business conditions index is also still in positive territory, but it shaved off 3 points to print a reading of 7 points in December. In addition, commentary from the NAB survey noted that the NAB found “little signs of a fundamental weakening in the non-mining recovery.” As such, the NAB survey concluded that “monetary policy is expected to remain on hold for an extended period.”

Moving on, AIG’s Performance of Manufacturing Index (PMI) for the December period dipped from 52.5 to 51.9. But on a more upbeat note, this marks the sixth consecutive month that Australia’s manufacturing sector has been expanding and the “longest unbroken run of expansion since 2010,” according to AIG’s PMI report. However, of the 8 manufacturing sub-sectors being tracked, only 5 were expanding with the metal products (48.6 vs. 49.0 previous) and the closely related machinery & equipment (47.2 vs. ) sub-sectors being the main losers.

Forex Snapshot: Australian PMI

Australian PMI

AIG has also released its Performance of Services Index (PSI) and it wasn’t good since the contraction in the services sector worsened from 48.2 to 46.3. looking at the details of the report, only 2 of the 9 sub-sectors were well above the 50.0 neutral while the accommodation, cafes, and restaurants sub-sector was essentially stagnant at 50.1. All others sub-sectors were contracting, with the most noticeable ones being the finance and insurance (46.5 vs. 54.2 previous) and retail trade (48.2 v.s 45.0 previous) sub-sectors since they point to the potential weakening of consumer spending.

Forex Snapshot: Australian PSI

Australian PSI

Consumer Spending & Sentiment

The Westpac–Melbourne Institute Index of Consumer Sentiment fell by 3.5% to 97.3 in January from 100.8 back in December, which means the average bloke and sheila are now a slightly pessimistic lot. The report attributed the sudden pessimism to volatility in the global markets. Specifically, oil slumped by 20% during the survey period while domestic the U.S. equities market was down by 8.0%, with the domestic Australian equities market following closely with a 7.6% drop.

Forex Snapshot: Australian Consumer Confidence

Australian Consumer Confidence

Meanwhile, the latest retail sales report covering the November period saw a slower month-on-month increase in retail trade turnover (+0.4% vs. +0.6% previous), but registered faster increase on an annualized basis (4.1% vs. 3.9% previous), marking the second consecutive month of improvements after a sudden drop back in September.

Forex Snapshot: Australian Retail Sales y/y

Australian Retail Sales y/y

The slower month-on-month increase was mainly due to a sudden contraction in department store retailing (-0.8% vs. 3.6%) and slower retail sales turnover in the food retailing (0.2 vs. 0.6% previous) and household goods retailing (0.9% vs. 1.2% previous) sub-components.

Trade

Forex Snapshot: Australian Trade Balance

Australian Trade Balance

Australia had a trade deficit of $2.90 billion in November, which is a bit better than the previous month’s trade gap of $3.25 billion. The smaller decline was due to a small rise in total exports from $26.60 billion to $26.76 billion, and a small decline in imports from $29.85 billion to $29.67 billion.

Forex Snapshot: Australian Exports

Australian Exports

The main contributor for the rise in exports came from 15% increase in rural goods (i.e. meat, wool, cereals, and other agricultural products) while non-rural goods saw a 1.34% decline, with exports of metal ores and minerals declining by 0.33% while exports of coal, coke, and briquettes declined by 1.51%.

On the import side of the equation, consumption goods increased by around 1%, which is good since it implies healthy consumer spending. But on the flipside, industrial imports were mostly down. Imports of machinery and industrial equipment, for instance, was down by 16% while imports of industrial transport equipment was down by 22%.

Inflation

Australia’s CPI readings for December followed the main theme for the other major economies in that Australia’s CPI worsened on a quarter-on-quarter basis (0.4% vs. 0.5% previous) but the year-on-year reading saw an improvement (1.7% vs. 1.5% previous).

Forex Snapshot: Australian CPI q/q

Australian CPI q/q

Forex Snapshot: Australian CPI y/y

Australian CPI y/y

On an annualized basis, most of the major components saw increase, with the transport (-1.4%) and communication (-6.3%) components being the only exceptions. With regard to the transport component, the main drag came from the 8.7% fall in automotive fuel prices.

On a quarterly basis, the transport (-1.4%) and communication (-2.4%) components were once again the main drags, but the health group (0.4%) is part of the team this time. The main downward contributor to the transport group was, as usual, the continuing slump in automotive fuel (-5.7%).

Summary & Conclusion

Overall, the available economic reports show that domestic consumer spending remains rather robust, which is certainly gonna help keep Australia’s economy afloat. Although the PSI report, which is a leading indicator, hints at possible troubles in the retail trade sector, which is bad since the retail trade sector’s performance is a good gauge for consumer spending. And while there are signs of a shift away from the resources sector, the contractions in industrial imports during October and November imply that the shift is slowing down. Incidentally, the contractions will likely hurt the Q4 2015 reading for Australia’s GDP as well since machinery and industrial equipment form part of gross fixed capital formation (i.e. investments).