G’day, forex mates! If you’re wondering how Australia’s economy is faring recently, or if you just wanna see the “bigger picture” now that the RBA statement is done and over with, then this Economic Snapshot is just for you.
Note: Like my other Economic 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.
- Australia’s Q4 2016 GDP contracted by 0.5% quarter-on-quarter, missing expectations for a 0.2% expectation.
- This is the first contraction since Q1 2011.
- In addition, this is the worst reading since Q4 2008.
- The 10.4% slump in government investment, otherwise known as public gross fixed capital formation, was THE major drag, subtracting 0.5% from Australia’s quarter-on-quarter GDP growth.
- Back in Q2, the rather large 16.8% increase in government investment was THE main driver, adding 0.7% to GDP growth.
- In fact, I quipped in my September’s Economic Snapshot for Australia that “Basically, the Australian economy was kept afloat by the government.”
- The 0.8% fall in private investment was also a major drag, subtracting 0.2% from total GDP growth.
- Private investment has been contracting for seven consecutive quarters already as of Q3.
- Investment in residential and non-residential building got hit the hardest.
- And according to the GDP report, the slide in construction activity “can be partly attributed to high rainfall levels.”
- That’s right, the Australian Bureau of Statistics (ABS) is blaming the weather.
- Net trade was also a major drag, subtracting 0.2% from total GDP growth.
- The negative contribution from trade was due to the 1.3% increase in imports easily overpowering the 0.3% increase in exports.
- Year-on-year, Australia’s economy grew by 1.8% in Q3.
- This a drastic slowdown from Q2’s 3.1% annual rate of growth.
- Moreover, this is the slowest year-on-year expansion since 2009.
- The drastic slowdown was due to weaker government spending and household spending, but the biggest factor was the much weaker positive contribution from trade.
- Exports only increased by 6.0% in Q4 (9.6% previous) while imports also increased by 2.3% (-0.5% previous).
- As a result net trade only added 0.7% to total GDP in Q4 (+2.2% previous).
- Australia’s seasonally-adjusted jobless rate worsened from 5.7% to a six-month high of 5.8% in December.
- This marks the second straight month of deteriorating readings for the jobless rate.
- But on a slightly more upbeat note, the labor force participation rate improved from 64.6% to 64.7%.
- This marks the second consecutive month of improvements for the participation rate.
- The deterioration in the jobless rate therefore isn’t that bad.
- Still, the number of unemployed people increased from 726.4K to 741.1K, so the Australian economy wasn’t able to absorb the influx of new and/or returning workers.
- In terms of job growth, the Australian economy saw a net increase of 13.5K jobs in December.
- Australia has been seeing positive jobs growth for three consecutive months already.
- The net increase in December was due to 9.3K full-time jobs and 4.2K part-time jobs.
Australia has been generating full-time jobs for three straight months already.
- However, full-time job creation has been slowing, with the most recent reading being the lowest.
- Q4 2016’s headline CPI rose by 0.5% quarter-on-quarter, slower than Q3’s +0.7%.
- Year-on-year, CPI grew by 1.5%, accelerating from the previous quarter’s 1.3%.
- This marks the second month of improvements for the annual reading.
- The reading is in line with the RBA’s forecast from its November Monetary Policy Statement.
- It’s still some distance from the lower bound of the RBA’s target range, though.
- For reference, the RBA’s target range for annual headline inflation is 2-3%.
- Meanwhile, the annual core reading slowed further from 1.7% to 1.6%, a low not seen since 1998.
- However, the reading is still a tick higher than the RBA’s forecast of 1.5%.
- On a quarter-on-quarter basis, 4 out of the 11 sub-components got hit in Q4, with the rest printing increases.
- In contrast only 3 of the 11 sub-components got hit in Q3.
Business Conditions & Sentiment
- The National Australia Bank’s (NAB) business confidence index held steady at 6 index points in December.
- Business sentiment has been positive since September 2013.
- However, the NAB business conditions index spiked from 6 to 11 index points.
- Commentary from NAB noted that the spike was due to large gains in profitability and and trading conditions.
- In addition, NAB warned that the rebound could be temporary, adding that “Weakness in retail conditions is particularly concerning given the importance of household
consumption to the economic outlook. In addition, we are not seeing any real signs in the Survey of a convincing recovery in non-mining
investment – crucial to both near-term and longer-term growth prospects.”
- The NAB labour costs index, meanwhile, showed that wage growth moderated in
- December, growing by 0.6% quarter-on-quarter (+0.7% previous).
- Overall, NAB concluded that its survey results are “encouraging” but a closer look “raises some doubts over the sustainability of any rebound.”
- Moving on, business loans in December grew at a faster pace, increasing only by 1.1% month-on-month (+0.6% previous).
- This is the biggest monthly increase in business credit since September 2015.
- Also, business loans have been increasing for six consecutive months already.
- Year-on-year, business loans increased by 5.6% (+4.9% previous).
- This is the best reading in four months.
- Business credit has been growing (on an annual basis) since September 2011.
- Looking forward, the Australian Industry Group’s (AIG) performance of manufacturing index (PMI) suddenly plunged from 55.4 to 51.2 in January.
- The slump in the headline reading was due to a broad-based slump across most of the sub-indices, with production, new orders, exports, sales, and deliveries all taking hits.
- AIG’s performance of services index (PSI) also got hit, diving from 57.7, a high not seen since May 2007, to 54.5 in January.
- The weaker reading was due to lower readings for 4 out of the 5 sub-indices.
- As for AIG’s performance of construction index (PCI), it rose from 47.0 to a four-month high of 47.7 in January.
- The reading is still below the 50.0 stagnation level, though, so the construction sector is still contracting, albeit at a slightly slower pace.
- AIG’s PCI reading has been below 50.0 for four consecutive months already.
Consumer Sentiment & Housing
- On a monthly basis, retail trade turnover fell by 0.1% between November and December.
- This is the first negative monthly reading in four months.
- Also the monthly readings for retail trade turnover had been trending lower for four consecutive months already.
- The year-on-year reading, meanwhile, printed a weaker 3.2% increase (3.3% previous).
- Regarding personal loans, both the monthly and annual readings were in negative territory in December.
- On a monthly basis, personal credit fell by another 0.1% in December.
- Aside from October’s flat reading, personal credit has been falling on a monthly basis throughout 2016.
- Year-on-year, personal loans dropped by 1.3%, the worst reading in three months.
- As such, it’s no real wonder why retail trade turnover also fell.
- Housing loans to owner-occupiers, meanwhile, continue to grow at a steady 0.4% month-on-month.
- Year-on-year, it moderated further, printing a 6.4% pace, which is the lowest reading since October 2015.
- As for housing loans to investors, they grew by 0.8% month-on-month, accelerating from November’s +0.7%.
- On an annual basis housing loans to investors grew by 6.2%, which is much faster than the previous month’s 5.6%.
- The current annual reading is the fastest pace of growth since March 2016.
- Housing loans to investors have been steadily picking up the pace 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 beginning to pick up again, increasing the chance of a housing bubble, but the reducing the chance of further rate cuts.
- Trend wise, overall housing credit continued to ease, though, increasing only 6.3% year-on-year, the same pace as previous, and a shared lowest since June 2014.
- Australia seasonally-adjusted surplus widened to around $3,510 million in December.
- That’s in Aussie dollars, by the way.
- This is the largest trade surplus on record since comparable records began in 1971.
- In addition, this marks the second month of surpluses after over 30 consecutive months of deficits.
- The wider trade deficit was mainly due to exports surging by 5.4% to a record high of $32,630 million.
- This easily overwhelmed the 0.7% rise in imports to $29,120 million.
Putting it all together
Australia was in pretty bad shape in Q3 2016. GDP contracted for the first since Q1 2011 after all. However, things look a bit brighter for Q4 2016.
To begin with, business credit accelerated during the Q4 months, which would hopefully translate to higher business investment. Housing loans to investors also picked up, which will hopefully result to higher residential investments. As an added bonus, rising housing credit to investors may later lead to higher speculative pressure and higher chances of a housing bubble. And that may make the RBA think twice before cutting again.
Unfortunately, consumer spending is expected to be weak in Q4, since personal credit and retail sales took hits.
However, the crème de la crème for Australia has to be its trade data. As I noted earlier, trade was a drag in Q3 (on both an annual and quarterly basis). But as I highlighted earlier, Australia printed surpluses in November and December after over 30 months of deficits. These will definitely give GDP growth a boost in Q4. And according to the RBA’s February Statement of Monetary Policy, the RBA expects GDP to come in at 2.0% year-on-year in Q4.
Looking forward, there are early signs of weakness for Q1 2017, since AIG’s survey-based reports show that output, exports, and new orders in both the service and manufacturing sectors weakened in January. The construction sector, meanwhile, continued to deteriorate, albeit not so much as last time.
And looking at the RBA’s February projections, it looks like the RBA expects GDP to grow between 1.5% to 2.5% during the first half of 2017, so the RBA is already including the possibility that GDP growth would moderate further. Moreover, this is a downgrade from the RBA’s November projection of 2.5% to 3.5%. Although the RBA expects that annual GDP growth would still be on track for its original projection by the end of the year.
As for inflation, the readings for December were kinda low, but they were within the RBA’s own forecast range from the November RBA Statement of Monetary Policy, so no biggie there. In fact, the core reading was even a tick higher than projected.
Also note that the RBA February inflation projections for 2017 and 2018 were largely unchanged from its November projections. Although the RBA does expect annual headline inflation to come in at 2% by June 2017, which is the bottom of the RBA’s target inflation range of 2-3%.