G’day, forex mates! Pip Diddy noted in his most recent Top Forex Market Movers of the Week that the Aussie got creamed because of Australia’s very poor CPI readings, which brought rate cut expectations back into play. But what about the other aspects of Australia’s economy?
And since the RBA will be announcing its monetary policy this Tuesday (May 3, 4:30 am GMT), I thought that now would be as good a time as any to give y’all a snapshot on how Australia’s economy has been doing lately.
Note: As with all Forex Snapshots, there are nifty tables at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. The bullet points provided highlight the underlying details and trends that give the numbers their proper context, however.
- 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 the Australian 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.
- Australia’s seasonally-adjusted jobless rate for the March period ticked lower to 5.7% from 5.8%.
- This is the lowest reading since September 2013.
- Meanwhile, the labor force participation rate held steady at 64.9%, so the downtick in the jobless rate seems to be a healthy one.
- The Australian economy had a net increase of 26.1K jobs in March, breaking three consecutive months of net losses.
- However, the net increase in employment was due to the 34.9K net increase in part-time jobs which were partially being offset by the net loss of 8.8K full-time jobs.
- Part-time jobs generally don’t pay as well as full-time jobs, so the large increase increase in part-time jobs isn’t that upbeat.
- The seasonally-adjusted monthly hours worked also fell by 17.5 million hours.
- This is the second consecutive month that monthly hours worked declined and is bad because fewer hours worked means less money earned.
- The loss of full-time jobs, the increase in part-time jobs, and the continuing decline in hours worked could potentially mean weaker consumer spending despite a lower jobless rate.
- Q1 2016 headline CPI slid by 0.2% quarter-on-quarter, missing expectations that it will advance by 0.3%.
- This is the first negative quarter-on-quarter headline CPI reading since Q4 2008.
- This also marks the fourth consecutive month that headline CPI has been trending lower on a quarter-on-quarter basis.
- Year-on-year, CPI grew by 1.3%, which is slower than the previous quarter’s 1.7%.
- The annual headline reading is now some distance away from the RBA’s target range of 2.0% – 3.0%.
- Meanwhile, the annual core reading slowed to 1.7%, breaking two consecutive quarters of improving readings.
- This is the lowest annual core reading ever since Q2 1999’s record low of 0.87%.
- On a quarter-on-quarter basis, 6 out of 11 sub-components got hit.
- One of the biggest drags was the transport component, due mainly to the 10% decline in the price of automotive fuel.
Business Conditions & Sentiment
- The National Australia Bank’s (NAB) business confidence index increased to 6 points in March.
- The increase in business confidence was broad-based, with the mining sector and the retail trade sector being the most notable exceptions.
- The NAB business conditions index jumped to 12 points, which is the highest value since early 2008.
- The manufacturing sector reported the largest improvement in business conditions.
- However, business conditions in the mining and retail trade sectors continued to deteriorate.
- The continuing deterioration in the retail trade sector is particularly alarming since consumer spending has been supporting Australia’s economy while it continues to shift away from being too dependent on the mining sector.
- Moving on, the Australian Industry Group’s (AIG) performance of manufacturing index (PMI) for March increased for the ninth consecutive month, climbing to 58.1, which is the strongest reading since April 2004.
- AIG’s performance of services index (PSI) dipped back into contraction territory in March after a brief expansion in February (49.5 vs. 51.3 previous).
- AIG’s performance of construction index (PCI) continued to deteriorate, printing a 45.2 in March (46.1 previous), which is a one-year low.
- This is the fourth consecutive month that PCI has been in contraction territory.
- The poor PCI reading was attributed to “soft overall demand conditions, citing fewer new tender opportunities and strong competition for the available work.”
- Loans to businesses continue to grow but only increased by 0.3% month-on-month in March.
- On a year-on-year basis, business credit grew by 6.5% in March, the same pace as the previous month.
Consumer Spending & Housing
- Retail trade turnover in Australia stagnated in February after a weak 0.3% growth previously.
- Relating this to business conditions in March, retail trade turnover in March likely stagnated or even contracted on a monthly basis.
- Year-on-year, retail trade turnover increased by 3.7% in February, which is slower than February’s 4.0% increase.
- This is the slowest annual increase in five months.
- Personal credit continued to deteriorate, contracting by 0.3% month-on-month and by 1.0% year-on-year.
- This is not a good sign for consumer spending.
- Housing loans to owner-occupiers continue to grow at a steady 0.5% month-on-month, but has been growing at a faster rate year-on-year.
- Meanwhile, housing loans to investors only grew by 0.3% month-on-month (0.5% previous) and 7.0% year-on-year (7.6% previous).
- Trend-wise, the growth of housing loans to investors has been steadily moderating, which would ease some pressure from the Australian housing market.
- Australia had a seasonally-adjusted trade deficit of around $3,410 million in February, which is wider than January’s trade deficit of $3,156 million.
- The wider trade deficit was due to a 1.2% contraction in exports (+1.8% previous) while imports only slid by a barely noticeable 0.19%.
- Still, imports have been decreasing for five consecutive months now.
- After three months of large declines, imports of capital goods finally picked up ever so slightly in February, increasing by 0.45%.
Putting it all together
Australia’s CPI readings for Q1 2016 were just horrible, so it’s not surprising why market analysts began predicting a rate cut for the upcoming meeting, with the Aussie taking a plunge as a result. After all, RBA Governor Glenn Stevens did say in the previous RBA statement that:
“Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.”
And while Australia’s labor market looks awesome on the surface, the details are not as upbeat since the number of hours worked continued to decline, which means lower productivity and lower earnings. Also, Australia finally saw a net increase in jobs back in March, but these came from part-time jobs and are therefore generally paid less.
All of that, together with deteriorating conditions in the retail trade sector and contracting personal loans, point to weaker consumer spending, which is bad because consumer spending in January and February were pretty weak already, and domestic consumer spending has been keeping Australia’s economy afloat while Australia transitions away from the resource sector.
Also, trade is still in the red and business conditions in the construction industry continue to worsen, so the lack of investment in non-residential buildings may be a drag on GDP growth yet again.
In short, Q1 2016 GDP growth may have slowed, at least on a quarter-on-quarter basis, so the RBA has that on its plate, aside from the poor CPI readings.