Forex Snapshot: Australia’s Economy

Hello, forex friends! The Aussie was really giving its forex rivals the boot last week, huh? If that made you wanna see the “big picture” on Australia’s economy, then this Forex Snapshot is just for you!

Note: If you’re in a hurry, then you can go ahead and skip to the tables at the bottom. The bullet points provided highlight the underlying details and trends that give the numbers their proper context, however.

Growth

  • Quarter-on-quarter, GDP only grew by 0.6% in Q4, which is much slower than Q3’s 1.1% (revised higher from 0.9%).
  • Year-on-year, GDP grew by 3.0% in Q4, which is faster than Q3’s 2.7% (revised higher from 2.5%).
  • This marks the second consecutive quarter that GDP has been growing faster on a year-on-year basis.
  • This is also the fastest year-on-year expansion in seven quarters
  • Household spending was still the backbone of Australia’s economy, expanding further by 0.8% (0.7% previous) and adding 0.4% to GDP growth, which is the same contribution as in Q3 2015.
  • Private investment in non-residential buildings continued to drop (-7.0% vs. -5.3% previous), reflecting the slowdown in mining-related investment.
  • The contraction in spending on non-residential buildings is also the biggest drag, subtracting 0.5% from GDP growth (0.4% previous).
  • Investment on machinery and equipment did see a 1.6% increase (-4.6% previous), though, adding 0.1% to GDP growth (-0.2% previous).
  • Exports and imports both grew by 0.6%. They also effectively canceled each other out.
  • Regarding specific industries, mining continued to grow (surprisingly enough), expanding by 1.1% after growing by 4.1% back in Q3, and adding 0.1% to GDP growth (0.4% previous).
  • Manufacturing slumped harder, however, (-2.1% vs. -0.9% previous), subtracting 0.1% from GDP growth.

Inflation

  • Q4 2015 CPI advanced by 0.4% quarter-on-quarter, slightly slower than Q3’s 0.5%.
  • This marks the second consecutive quarter that CPI has been increasing at a lower rate.
  • Year-on-year, CPI grew by 1.7%, which is a bit faster than the previous quarter’s 1.5%.
  • This is still a few ticks away from the RBA’s target of 2.0% – 3.0%.
  • The core reading climbed higher for the second straight quarter (2.1% vs. 2.2% previous).
  • One of the main contributors to the quarter-on-quarter reading was the 2.7% increase in the cost of alcohol and tobacco products
  • The cost of alcohol and tobacco products is being artifically boosted by an inrease in the federal excise tax effective from 1 September 2015.
  • The transport group was one of the main drags, printing a 1.4% decline after a 0.1% rise back in Q3. This was due mostly due to the 5.7% decline in the cost of automotive fuel (-1.7% previous).
  • Year-on-year, rising alcohol and tobacco prices are still the main drivers (6.0% vs. 5.0% previous).
  • The communication group was the main drag on a yearly basis (-6.3% vs -4.1% previous), although the transport group is still in negative territory (-1.4% vs. -2.2% previous).

Employment

  • The seasonally-adjusted unemployment rate unexpected during the January period unexpectedly jumped from 5.8% to 6.0%.
  • The labor force participation rate held steady at 65.2%, but the number of unemployed climbed by 30,200 to 761,400.
  • The Australian economy had a net loss of 7,900 jobs.
    40,600 full-time jobs were lost, but this was partially offset by a gain of 32,700 part-time jobs.
  • This is the largest loss of full-time jobs in just over two years.
  • This doesn’t bode well for Australia’s economy since full-time jobs generally offer more pay and security than part-time jobs.

Consumer Sentiment & Spending

  • Retail trade turnover in Australia increased by 0.3 month-on-month during January after stagnating during the previous month.
  • On a year-on-year basis, retail trade turnover increased by 4.0% in January 2016, the same pace as in December 2015.
  • Household goods store (1.0% vs. -1.0% previous), cafes, restaurants and takeway food services (0.1% vs. -0.5% previous), as well as clothing and footwear stores (1.0% vs. 1.1% previous) and other retail stores (1.4% vs. -0.9% previous) reported increases.
  • Food retailers (-0.2% vs. 0.8% previous) and department stores (-1.3% vs. 0.1% previous) reported fewer sales.
  • The Westpac Melbourne Institute Index of Consumer Sentiment for the February period advanced by 4.2% to 101.3 from 97.3.
  • The improvement in consumer sentiment was due to improved financial expectations, with the recent drop in oil prices providing a decent boost to disposable incomes.

Business Conditions & Sentiment

  • The National Australia Bank’s (NAB) business confidence index held steady at 2 points during January, but confidence in the mining sector continued to deteriorate.
  • Surprisingly, business confidence in retail trade also took a hit, but higher business confidence in finance, property development, and business services easily offset the downbeat sentiment from retail and mining.
  • The NAB business conditions index eased even further from 6 points to 5, with the deterioration being largely centered on Western and South Australia where the mining slowdown has the biggest impact.
  • Business conditions in the service sector continue to be robust, with the exception of retail.
  • The Australian Industry Group’s (AIG) performance of manufacturing index (PMI) for February climbed to 53.5, which is the strongest reading since July 2010.
  • PMI has been above the 50.0 stagnation level for eight consecutive months now.
  • After four consecutive months of contractions, AIG’s performance of services index (PSI) finally clawed its way back above the 50.0 level, printing a 51.3 in February (48.4 previous).
  • The service sector is heavily consumer-oriented, so this could mean that consumer spending may be strengthening.
  • AIG’s performance of construction index (PCI) continued to deteriorate, printing a 46.3 in January (46.8 previous).
  • This is the second consecutive month that PCI has been in contraction territory.
  • The poor PCI reading was attributed to “a lack of new work to replace projects completed at the end of 2015 and a continued winding back in mining and heavy industrial construction work.”

Trade

  • Australia had a seasonally-adjusted trade deficit of around $2,937 million in January 2016, which is 16.6% smaller when compared to December 2015’s trade deficit of $3,524 million.
  • The smaller trade deficit was due to a 1.1% increase in exports (-4.4% previous) and a simultaneous 1.1% decrease in imports (-1.5% previous).
  • Imports have been decreasing for four consecutive months now.
  • Imports of consumer goods fell by 1.0 (same as previous), but it’s not a worrying thing since consumer spending remains robust, which likely means that Australians are buying more domestic goods.
  • The continuing decline in capital goods (2.0% vs. 3.0% previous) is a bit worrying since that implies that private investment may be a drag on Q1 2016 GDP.

Forex Snapshot - Australia's Economy: Growth

Forex Snapshot - Australia's Economy: Inflation

Forex Snapshot - Australia's Economy: Employment

Forex Snapshot - Australia's Economy: Consumer Sentiment & Spending

Forex Snapshot - Australia's Economy: Consumer Sentiment & Conditions

Forex Snapshot - Australia's Economy: Trade

Putting it all together

Consumer spending was the backbone of Q4 2015’s GDP, and the currently available numbers indicate that that’s also gonna be the case for Q1 2016, especially since Australia started the year with a trade deficit. However, the large decrease in full-time jobs during January may threaten that scenario.

And while there are signs that Australia’s economy is moving away from the resources sector, the weakening mining sector is having an adverse effect on the construction industry. Time will tell if the negative effect will persist and how much of an impact it will have on Australia’s economy, but one thing the current numbers show is that the continuing decrease in mining investment will likely continue to be a drag on Q1 2016 GDP.

Finally, Australia’s quarter-on-quarter readings are still in bad shape, even though the increase in the excise tax is boosting inflation artificially. Forex traders are also advised to keep an eye on inflation since RBA Glenn Stevens said in his most recent statement that “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.”