G’day, forex mates!
We’ve got another RBA statement coming our way this Tuesday, so I thought that now would be a good time to give y’all a roundup of Australia’s major economic reports.
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 printed a 1.1% quarter-on-quarter expansion, beating forecasts for a 0.7% increase.
- The rebound means that Australia avoided a technical recession after Q3’s disappointing 0.5% contraction.
- The 0.9% increase in household spending (+0.4% previous) was the main driver for the recovery since it added 0.5% to GDP growth (+0.2% previous).
- Private business investment was also a driver, adding 0.2% to GDP growth (-0.1% previous).
- This marks the first increase in private business investment after nine consecutive quarters of declines.
- Government investment became a major driver again after being the main drag in Q3.
- Government investment increased by 7.7% (-7.8% previous), adding 0.3% to total GDP (-0.4% previous).
- The 34.2% surge in national defense investment, in turn, was the main driver for total government investment.
- Net trade was also a driver, adding 0.2% to total GDP, thanks to the 2.2% increase in exports.
- Trade was a dud back in Q3 since exports and imports effectively canceled each other out.
- Year-on-year, Australia’s economy grew by 2.4% in Q4.
- This is above the RBA’s forecast of 2.0%, as stated in the February 2017 Monetary Policy Statement.
- Also, Q3’s +1.8% annual growth, which was the slowest year-on-year expansion since 2009, was upgraded to +1.9%.
- The major driver for the faster year-on-year growth was net trade since it added 1.5% to total GDP growth (+0.7% previous).
- Household spending was also a major driver, adding 1.5% to annual growth (+1.4% previous).
- Meanwhile, private business investment was less of a drag, subtracting only 0.8% from GDP growth (-1.4% previous).
- Australia’s seasonally-adjusted jobless rate worsened from 5.7% to 5.9% in February.
- This is the worst reading since January 2016.
- The labor force participation rate held steady at 64.6%, so the deterioration in the jobless rate was due only to the number of unemployed people rising from 720K to 748K.
- In terms of job growth, the Australian economy printed a net loss of 6.4K jobs.
- This is the first net decrease in jobs after four consecutive months of growth.
- But on a slightly more upbeat note, full-time employment increased by 27.1K.
- However, it’s still not enough to make up for January’s disappointing 44.1K loss.
- Moreover, the loss of 33.5K part-time jobs more than offset the increase in full-time jobs.
- 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 2016 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 eased from 10 index points to just 7 in February.
- The reading is still above zero and its long-run average, so the reading is still relatively good.
- Also, business sentiment has been positive since September 2013.
- NAB’s business conditions index, meanwhile, also slid lower from 16 to 9 index points.
- Most industries reported easing business conditions, but still in positive territory overall.
- The only exception was retail trade since it scored a big, fat zero.
- Despite the weaker readings for business sentiment and conditions, NAB concludes that “both of these indicators remain at levels consistent with solid business activity in the near-term, and are higher than through much of H2 2016.“
- As for NAB’s labor costs index, it showed that wage growth remained to elevate but moderated a bit in the three months to February (+0.8% vs. +0.9% previous)
- Moving on to the Australian Industry Group’s (AIG) performance of services index (PSI), plunged yet again, this time from 54.5 to 49.0.
- This is the first reading below the 50.0 neutral level in five months.
- Almost all sub-indices took hits.
- The sales sub-index, in particular, took a severe 10.6 hit and got pushed lower to 46.8.
- Survey respondents blamed “lower demand from mining customers, lower spending by households and adverse local weather events such as the eastern heatwave, a lack of rain and local storms.”
- The services sector may have had a hard time in February, but the manufacturing sector was in cloud nine since AIG’s performance of manufacturing index (PMI) soared from 51.2 to 59.3.
- This is the best reading since May 2002.
- Six of the seven sub-indices printed increases, but the most noteworthy was the very substantial 15.4 points increase to 65/3 in manufacturing production.
- Almost all manufacturing industry categories also reported improvements and had readings above 50.0.
- The only exceptions were the printing and recorded media, whose PMI reading held steady at 48.3.
- Manufacturing wasn’t the only one that did well since AIG’s performance of construction index (PCI) also rose from 47.7 to 53.1 in February.
- This is the first reading above 50.0 in five months.
- In addition, February’s reading is the best since June 2016.
- Housing construction activity jumped by 10.7 points to 60.9, the highest reading since June 2016.
- Commercial building activity also printed a solid increase of 6.1 points, bringing its reading to 53.6.
- Moving on, business loans continued to contract in February, albeit at a weaker pace (-0.1% vs. -0.4% previous).
- This marks the second month of declines after six consecutive months of increases.
- Year-on-year, business loans only increased by 3.7%.
- This is the weakest year-on-year reading since August 2014, as well as marking the second straight month of weakening readings.
- Business credit has been growing (on an annual basis) since September 2011.
Consumer Spending & Credit
- Month-on-month, retail trade turnover in Australia rose by 0.4% in January.
- This is a major rebound from December’s 0.1% fall, which was the first negative reading in four months.
- However, the details aren’t that great since the rebound was driver mostly by the 1.1% surge in retail sales from cafes, restaurants, and takeaway food establishments (+0.1% previous).
- Other retail store types only printed small increases.
- Department stores, meanwhile, printed a 0.5% decrease in sales (+0.4% previous).
- Clothing and footwear stores also reported a 0.4% decrease in sales after a 1.3% surge during the previous month.
- Moving on, the year-on-year reading printed a 3.2% increase in retail sales turnover.
- This is the same annual rate of increase as in December 2016.
- Regarding personal loans, both the monthly and annual readings were in negative territory again in February.
- On a monthly basis, personal credit fell by 0.1% in February.
- Year-on-year, personal credit printed a 1.3% tumble.
- Both monthly and annual readings for personal credit have been contracting since January 2016.
- Housing loans to owner-occupiers, meanwhile, continue to grow at a steady pace, with a 0.5% month-on-month.
- Year-on-year, it moderated further, printing a 6.2% pace, which is the lowest reading since September 2015.
- While this may be bad for GDP, the steady monthly reading and weakening annual reading do point to a reduced chance for a housing bubble.
- As for housing loans to investors, they increased by 0.6% month-on-month in February, decelerating from January’s +0.7%.
- On an annual basis, however, housing loans to investors grew by 6.7%, which is the fastest reading since February 2016.
- Also, 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.
- Trend-wise, overall housing credit printed another 6.4% increase.
- Total housing credit bottomed out at 6.3% back in November 2016.
- Australia seasonally-adjusted surplus narrowed from December’s record-high $3,335 million to $1,302M.
- That’s in Aussie dollars, by the way.
- The weaker reading is a bad start for Q1 2017.
- But on an upbeat note, this marks the third month of surpluses.
- The narrower surplus was due to exports contracting by 2.9% and imports surging by 3.7%.
- This is the first decline in exports in seven months.
- And the 38.97% slump in exported non-monetary gold followed by the 1.95% fall in exported non-rural goods (iron ore, coal, copper, etc.) were the main drags.
- The surge in imports, meanwhile, pushed the value of imports to a record high of $30,494 million.
- On an optimistic note, the surge in imports was due to the 6.80% jump in imported consumer goods, 3.22% increase in imported capital goods, and 3.82% rise in imported intermediate and other merchandise goods.
Putting it all together
The RBA remained relatively upbeat during the March RBA statement because Q4 2016 CPI was in line with its November projections while Q4 2016 GDP growth exceeded its February projections.
And the recovery in Q4 2016 was an impressive comeback since Australia avoided a technical recession while printing the first quarter-on-quarter increase in private business investment after nine consecutive quarters of declines.
Looking forward, trade is off to a bad start, since Australia’s trade surplus narrowed in January. But on an upbeat note, there was a relatively large increase in capital goods, which means that business investment may print another positive reading. There was also an increase in intermediate and other merchandise goods, which could be a sign that Australia is continuing to shift away from its dependence on commodities export for growth.
And while NAB’s business confidence and conditions indices both eased in February, NAB concludes that “both of these indicators remain at levels consistent with solid business activity in the near-term.” Things therefore still look upbeat in February.
And AIG supports this view since AIG’s PMI and PCI both printed significant improvements. AIG’s PSI was more disappointing, but AIG did hint that the weakness may be temporary, since “adverse local weather events such as the eastern heatwave, a lack of rain and local storms” were cited for the weakness in the service sector.
Unfortunately, AIG also noted that “lower spending by households” was also a factor, and that is a bit worrying since it threatens January’s retail sales recovery. Also, NAB noted that the retail trade industry was the only industry that had a big, fat zero for its business conditions index in February – all other industries had positive readings.
Speaking of household spending, the RBA expressed concern in the minutes of its March meeting that “although credit growth was lower than in previous decades, it had been faster than the subdued growth in household incomes.”
You see, as explained in the RBA’s February Statement of Monetary Policy, “If households believe that their prospects for future income growth have weakened, particularly for those households servicing sizeable debts, then they could choose to save more in the near term and consumption growth could be lower than forecast.”
In other words, if consumer credit continues to grow, but income does not catch up, then households may sooner or later decide to start saving more instead in order to pay their debts.
That would obviously lead to weaker consumer spending, and by extension, weaker GDP growth. And remember, household spending is a major driver for Australia’s GDP growth.
So far, however, there are no signs of severe weakness, since annual retail sales have been steady trend-wise. But then again, it’s not really picking up either.
Moving on, the minutes also revealed that the RBA was a bit worried, since “there had been a build-up of risks associated with the housing market,” given that “Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income.”
And as noted in one of the bullet points, housing loans to investors accelerated further by 6.7% year-on-year, which is the fastest reading since February 2016.
Meanwhile, housing loans to owner-occupiers continue to ease. This implies that the housing market is fueled by speculative investment, which could potentially lead to a housing bubble.
This is bad, of course, but it does have the positive effect of making the RBA less inclined to cut rates further. After all, cutting rates further would make credit easier to come by, thereby pumping more air into a potential housing bubble.