Weaker GDP in Australia and the Ties That Bind

The 0.2 percent growth in Australia in the second quarter was the weakest outturn since 2011 and highlights Australia’s vulnerability to slower growth in China.

The Downside of Symbiosis

During the global slowdown around 2009, Australia was a standout among the advanced economies of the world as it posted just one quarter of negative GDP growth in the fourth quarter of 2008 and quickly returned to a steady growth rate. Recently released second quarter GDP figures show that the Aussie economy grew just 0.2 percent (0.7 percent at an annualized rate), which is among the slower Q2 growth rates in the developed world. The symbiotic relationship which made Australia so resilient during the slowdown has become its top economic vulnerability today and that is its dependence (both directly and indirectly) on China.

In terms of direct trade, China overtook Japan as Australia’s top export market in 2009. However, as growth in China has slowed, not only have Australian exports slowed, but with China’s once insatiable demand for commodities from all over the world having slackened, commodity prices have nosedived. This means that even to the extent that the volume of Australian commodity exports remains steady, the falling price environment is a constant headwind for nominal gains. So, slower growth in China has a negative indirect effect as well.

Net exports was the largest overall negative drag on headline GDP growth in the second quarter subtracting 0.6 percentage points (not annualized) from overall growth in the Q2. Inventories were a drag of 0.2 percent.

The export weakness shows up in the domestic economy too. The clearest example of this dynamic can be seen in the key mining sector, where production fell 3.0 percent in the period, although it is still up 2.1 percent year over year. Consumers are still spending and that helped lift growth in the quarter, but broadly, the contribution to growth from domestic demand was weak in the second quarter, and relative to a year ago, domestic demand is just barely making a positive contribution to growth.

Implications for the Reserve Bank of Australia

At its September 1 policy meeting, the Reserve Bank of Australia (RBA) cited the softening in the outlook for China and east Asia. It even took the unusual measure of noting the equity market volatility. That financial market instability, along with lower commodity prices, is weighing on the Aussie dollar. As the RBA put it in its policy decision statement, “equity prices have moved lower and been more volatile recently, in parallel with developments in global markets. The Australian dollar is adjusting to the significant declines in key commodity prices.”

Down nearly 14 percent vis-à-vis the U.S. dollar since May, the weaker Aussie dollar underpins inflation and diminishes the need for immediate rate cuts. The RBA is on hold for now, although further easing cannot be ruled out if weakness persists.