Partner Center Find a Broker

G’day, forex mates! Australia’s data dump for the month is finally over. And since another RBA monetary policy statement is coming our way next week, I thought today would be an opportune moment to give y’all the “broad picture” on Australia’s economy.

Growth

  • Australia’s GDP grew by 0.8% quarter-on-quarter in Q2 2017 GDP.
  • This is a faster rate of expansion compared to Q1 2017’s +0.3%.
  • Growth was driven mainly by the 0.7% increase in household spending (+0.5% previous), the 11.9% surge in government investments (-2.1% previous), and the 2.7% rebound in exports (-2.2% previous).
  • The main drag, meanwhile, the 1.1% drop in private investments (+1.0% previous).
  • And private investments slumped due mainly to the sharp 7.7% contraction in non-dwelling construction.
  • Year-on-year, Australia’s GDP expanded by 1.8% in Q2 2017.
  • This is the same rate of annual expansion as in Q1 2017.
  • However, this is the shared weakest annual rate of expansion since Q3 2009.
  • Even so, the year-on-year read is still within the RBA’s expectation of 1¾% growth for Q2 2017.

Employment

  • The Australian economy generated 54.2K jobs during the August period (29.3K previous).
  • This marks the third month of ever stronger jobs growth.
  • Even better, jobs growth was fueled mainly by the 40.1K increase in full-time jobs (-19.8K previous).
  • As for other labor indicators, Australia’s seasonally-adjusted jobless rate held steady at 5.6% for the third month in a row.
  • The RBA forecasts that the jobless rate will be between 5% to 6% by the end of Q4 2017, so the steady jobless rate in August is still evolving within the RBA’s forecasts.
  • However, the jobless rate held steady even as the labor force participation rate climbed higher from 65.1% to 65.3%.
  • That’s the best reading for the participation rate since September 2012.
  • More importantly, this means that the Australian economy was able to absorb the influx of new and returning workers since the jobless rate held steady.

Inflation & Wage Growth

  • Headline CPI rose by 0.2% quarter-on-quarter in Q2 2017.
  • This is the weakest reading in five quarters.
  • And the weakness was broad-based to boot since 6 out of 11 components printed decreases, 1 was flat, while only 4 printed increases.
  • Year-on-year, headline CPI advanced by 1.9%, which is slower than the 2.1% printed in Q1.
  • This puts an end to three consecutive quarters of better annual readings for CPI.
  • In addition, the reading missed the RBA’s original forecast for a 2.0% year-on-year rise.
  • Moreover, the dip means that headline CPI is now no longer within the lower bound of the RBA’s target range.
  • And for reference, the RBA’s target range for annual headline inflation is 2-3%.
  • As for the trimmed mean inflation, which is the RBA’s preferred measure for core or underlying inflation, it printed a 0.5% quarter-on-quarter increase, which is the same pace as last time.
  • Year-on-year, core CPI rose by 1.8% in Q2, matching the downwardly revised reading for Q1 (+1.9% originally).
  • Moving on to wage growth, total hourly earnings (excluding bonuses) in both the private and public sector increased by 0.5% quarter-on-quarter during Q2 2017.
  • This is a tick slower than the +0.6% reported in Q1 2017.
  • Trend wise, wage growth has been has been growting at a +0.5% or +0.6% quarter-on-quarter pace since Q2 2014 after trending lower from a peak of +1.0 back in Q1 2012.
  • Year-on-year, the wage price index increased by 1.9%.
  • Annual wage growth has been growing at a 1.9% clip for four consecutive quarters already.
  • Even so, this is the shared weakest year-on-year increase since comparable records began in Q3 1998

Business Conditions & Sentiment

  • National Australia Bank’s (NAB) business confidence index fell from 12 index points to just 5 index points in August.
  • This means that business sentiment remained upbeat, albeit not as much.
  • Also, business sentiment has been net positive since September 2013.
  • NAB’s business conditions index. meanwhile, improved from 14 to 15 index points.
  • This is the highest reading for business conditions since early 2008.
  • However, NAB noted that “business conditions are positive for most industries, although retail is a notable exception and appears to be deteriorating once again.”
  • NAB’s labour costs index, meanwhile, is still subdued but managed to climb higher to 1.4%.
  • According to NAB, this is the “highest level since early 2014,” which shows just how weak wage growth is.
  • As for NAB’s retail price index, it slid back into negative territory, printing a 0.1% decline, which is a bad sign for Q3 CPI.
  • Moving on, the headline reading for the Australian Industry Group’s (AIG) performance of services index (PSI) eased to a three-month low of 53.0 in August after reaching a seven-month high of 56.4 back in July.
  • The deterioration was pretty much broad-based, with new orders, sales, and employment sub-indices taking hits.
  • In particular, “activity in retail trade shrank at a worse rate in August (down by 1.1 points to 42.1 points).”
  • And while it’s good that the input prices sub-index rose by 0.4 points to 59.3 while the wages sub-index jumped by 2.6 points to 57.7.
  • It looks like like businesses in the service sector are not passing on their higher costs because the selling prices sub-index dropped by 1.6 points to 47.5.
  • According to AIG, “This is the lowest result for this subindex since August 2016.”
  • And according to survey respondents, “This drop in pricing reflects the price-dampening effects of the recently higher Australian dollar (which makes imported goods and services cheaper) coupled with an extremely competitive market and relatively weak background inflation.”
  • AIG’s performance of manufacturing index (PMI), meanwhile, jumped 3.8 points to 59.8.
  • This is the strongest reading since 2002.
  • New orders, production, inventories, and more were printing large improvements.
  • However, the improvements were not broad-based because the exports sub-index eased slightly further to 49.3.
  • This is below the 50.0 neutral level, which means that exports contracted in August.
  • On a more upbeat note, the wages sub-index for the manufacturing sector jumped by 3.3 points to 59.0.
  • Also, the selling price sub-index rose by 2.9 points to 53.7.
  • However, “Gains in selling prices remain relatively subdued and the pressure on manufacturer’s margins continues.”
  • Finally, AIG’s performance of construction index (PCI) unfortunately dropped from 60.5 to a four-month low of 55.3 in August.
  • The weakness in the construction sector was broad-based since almost all sub-indices took hits.
  • Housing construction, apartment construction, and commercial construction took the biggest hits.
  • However, the wages sub-index rose by 0.7 points to 65.3, which is a good sign for wage growth.
  • Sadly, the selling prices index fell 1.9 points to 57.2, which is a bad sign for CPI.
  • Despite this stumble, the wages sub-index remained relatively elevated, which is a good sign for wage growth.
  • As for business loans, that printed a 0.5% increase back in July, which is a slower increase compared to June’s +0.8%.
  • Still, this marks the fifth consecutive month of business credit growth.
  • Year-on-year, business loans increased by 4.2%, which is a tick slower compared to the previous month’s +4.3%.
  • But on a more upbeat note, business credit has been growing (on an annual basis) since September 2011.
  • Also, annual reading for July is still the second strongest reading since January 2017.

Consumer Spending & Credit

  • Retail trade turnover (seasonally-adjusted) in Australia was unfortunately flat month-on-month in July.
  • This is a poor start for Q3 GDP since retail sales rose by 1.0% month-on-monthly in April, 0.6% in May, and 0.2% in June.
  • This also means that consumer spending has been weakening on a monthly basis for three consecutive months already.
  • Looking at the details, 3 of the 6 major retail store types actually reported growth in trade turnover.
  • However, the 2.8% slump in sales from department stores (-0.5% previous), the 1.7% drop in household retailing (+0.7% previous), and the 0.2% lower trade turnover from clothing and footwear stores (+0.8% previous) were able to offset the increase in sales from the other store types.
  • Year-on-year retail trade turnover increased by 3.6%, which is a three month low and marks the second month of ever weaker annual readings.
  • This is a poor start for the year-on-year reading for Q3 GDP.
  • The lower annual reading was mainly due to lower trade turnover from household goods retailers (+4.2% vs. +5.6% previous) and cafes and restaurants (+4.4% vs. +5.5% previous).
  • As for personal loans, both the monthly and annual readings were in negative territory again in July.
  • Personal credit, on both a monthly and yearly basis, has been falling since January 2016.
  • On a monthly basis, personal credit fell by 0.1% in July.
  • This marks the fourth month of declines at a monthly pace of 0.1%
  • Year-on-year, personal credit slumped by 1.4%, which is the same rate of decline as in the past two months.

Housing

  • Housing loans to owner-occupiers grew by 0.5% month-on-month in July (+0.6% previous).
  • Year-on-year, this translates to a 6.1% increase, which is the a shared lowest reading since September 2015.
  • Housing loans to owner-occupiers has been growing at an annual pace of 6.1% for four months in a row as of July 2017.
  • As for housing loans to investors, they increased by another 0.4% month-on-month in July, which is the same pace as last time and is the slowest monthly increase since July 2016.
  • Year-on-year, housing loans to investors grew by 7.4%, which is the same reading as in the past two months and is the shared strongest reading since January 2016.
  • Also, housing loans to investors hasn’t had a downtick after bottoming out at an annual pace of 4.6% back in August 2016.
  • This may mean that speculative pressure on the Australian housing market is still picking up, increasing the chance of a housing bubble.
  • As for the total dwelling units approved in July, that fell by 1.7% to 18 299, thanks largely to the 6.7% slump in private sector dwellings excluding houses.

Trade

  • Australia seasonally-adjusted trade surplus narrowed from $888 million to $460 million in July.
  • That’s in Aussie dollars, by the way.
  • This marks the third consecutive month of surpluses.
  • However, the other Q3 months have a lot of catching up to do since the total surplus in Q2 was $2,725 million.
  • The smaller surplus was due to exports contracting by 2.23%, which was partially offset by the 0.91% decrease in imports.
  • Also, exports have been falling for two straight months already.
  • And exports declined in July mainly because of the 3.2% slump in exports of non-rural goods, namely metal ores and other minerals (-2.0%) and mineral fuels (-12.0%).

Putting it all together

The Australian economy grew at a faster quarter-on-quarter pace in Q2. However, the RBA is more interested on the year-on-year reading, and that came in at 1.8%, which is the same rate of annual expansion as in Q1 2017 and is the shared weakest annual rate of expansion since Q3 2009.

Even so, this is within expectations since the RBA forecasted GDP to grow by 1¾% in Q2.

Looking forward, the RBA expects GDP to grow between 2% to 3% by December 2017 (Q4 2017 essentially).

However, GDP components for Q3 are not painting a pretty picture at the moment, since the trade surplus shrank in July as exports contracted for the second month in a row. In addition, retail trade turnover in July were flat.

And things didn’t seem to improve in August since anecdotal evidence gathered and analyzed by AIG and NAB point to further weakness in exports and the retail trade industry during the August period.

Moving on to the labor market, that’s evolving within expectations since the jobless rate has been steady at 5.6%, which is within the RBA’s forecast range of 5-6%.

However, wage growth remained subdued, which is a bad sign for CPI and consumer spending. Heck, the 1.9% year-on-year increase in the wage price index is the shared weakest annua increase since Q3 1998.

But on a more optimistic note, NAB and AIG found evidence pointing to slightly tronger wage growth in August.

Speaking of CPI, Q2’s CPI rose by 1.9% year-on-year, which missed the RBA’s original forecast of 2.0%.

Australia has yet to release its Q3 CPI report. And while leading indicators from AIG and NAB noted that wage growth and input costs rose in July and August, most companies were not passing on their higher costs. In fact, some sectors reported lower retail prices, which is a bad sign for Q3 CPI.

And according to some of AIG’s survey respondents, “This drop in pricing reflects the price-dampening effects of the recently higher Australian dollar (which makes imported goods and services cheaper) coupled with an extremely competitive market and relatively weak background inflation.”

 As such, it’s only natural that the RBA keeps repeating its warning that:
“The appreciation of the Australian dollar over recent months, driven in part by a broad depreciation of the US dollar, was weighing on domestic growth and contributing to subdued inflationary pressure. A further appreciation of the Australian dollar would be expected to result in a slower pick-up in growth and inflation.”
It’s also quite understandable why the RBA remains reluctant to tighten its monetary policy.