Australia: GDP report could be a rogue one - Westpac

Australia’s economy has only shrunk in 3 quarters in the past 10 years (compared to e.g. 7 contractions in both the US and Canada, 9 in NZ), so this week’s data is hard to brush aside, suggests Sean Callow, Research Analyst at Westpac.

Key Quotes

“The timing of the economy’s shrinkage sits awkwardly in the context of ongoing global growth, as the RBA noted this week. To be sure, a soft quarter became increasingly likely as the Q3 partial data was released.”

“The RBA statement on Tue made it clear that it was braced for some “slowing in the year-ended growth rate…before it picks up again.” But how much slowing? The median forecast was -0.1%, well above the - 0.5% actual. And the RBA’s quarterly forecasts a month ago provided a range of 2.5% to 3.5% on GDP for end-2016. Now that the Q3 contraction is in the books, Q4 GDP would have to surge 1.8% q/q in order to reach the 3.0% midpoint of that range.”

“So it seems a safe bet that the RBA was with the majority of us in being surprised at the extent of the weakness in Q3. The chart across plots annual growth in spending, showing that the private sector has been decelerating for some time. Yet special factors did conspire to make the Q3 weakness exaggerated, including oddities such as a fall in housing construction which must surely rebound, along with public infrastructure.”

“The ABS is also not reporting much benefit to Australian exporters from the surge in commodity prices since May, reporting Oct exports up a mere 1.4%. Much better readings are surely ahead on GDP and exports though there will be extra focus on the Nov jobs data next week. Fortunately for AUD, the RBA doesn’t meet again until Feb and given the rise in global yields, rate cut talk isn’t likely to gain much traction.”

“Indeed we expect the US dollar to take a step back after the fully priced in Fed rate hike next week, which should leave AUD/USD on track for the 0.76 area by the turn of the year.”