Summary:
- Fourth quarter Australian GDP missed expectations producing the first back-to-back GDP per capita contraction since mid-2000s
- RBA’s Lowe confirms the probability regarding a next move in rates is evenly balanced
- Bank of Japan’s Harada warns that a sales tax hike could cause a recession
Bleak end of the year
The Australian economy barely grew in the final three months of the past year with the pace of growth undershooting the economists’’ median estimate. In real quarterly terms the economy expanded just 0.2% missing the consensus of a 0.3% increase. In real annual terms growth totalled 2.3% and turned out notably below expectations suggesting a 2.6% rise. Moreover, the details showed several warning signs.
The Australian economy grew in the fourth quarter at the pace below expectations. Source: Macrobond, XTB Research
First of all, on the back of the remarkably weak last quarter the overall pace of GDP last year finished at 2.3% YoY falling short of the RBA’s estimate of 2.8% YoY. Secondly, the consumers’ position weakened notably over the fourth quarter with spending rising only 2% YoY, the lowest pace of growth since mid-2013. As a result, a households’ contribution to annual GDP growth was 1.1 percentage points. Furthermore, despite the sluggish pace of consumer expenditure the household savings ratio only barely grew to 2.5%, up from its decade-low of 2.3%. This is not a positive signal looking forward as the Australian economy lacks an ability to boost GDP momentum via increased spending. That makes the Antipodean economy more sensitive to a more widespread slowdown. Other categories also contributed positively to annual GDP growth in the fourth quarter. Investment expenditure added 0.3% percentage points, net exports added 0.7 percentage points, inventories were flat while government spending added as much as 1.1 percentage points, the higher contribution since mid-2016 - a clear sign that the government boosted spending in order to counteract the more subdued economic expansion. It is also worth looking at GDP per capita as we got the first back-to-back contraction since mid-2000s. It was the effect of population growing faster than real GDP (0.4% vs. 0.2%). That means the Australian economy has officially entered a per capita recession. What’s more, this data tells us that there is a problem with productivity growth whereas subdued productivity growth hampers higher wage growth being an explanation why inflation in Australia has been constantly below the RBA’s target. The Australian dollar slipped considerably on the release and it is trading roughly 0.7% down at the time of writing. Note that implicit expectations, however, could have been somewhat lower than official ones following the dismal data on inventories and net exports. The market currently sees more than 60% chance for a rate cut by the year-end.
The EURAUD keeps struggling in the vicinity of the supply area at around 1.6020. The pair could be susceptible to heightened volatility due to the impending ECB’s rate decision. Source: xStation5
Central bankers’ comments
Asian hours trading brought a bunch of remarks from RBA’s Lowe as well as BoJ’s Harada. RBA’s Governor reiterated that the balance of risks regarding a next move in rates was evenly balanced. He underlined a growing difference between GDP and labour market data suggesting that the labour market’s strength is among major reasons discouraging the central bank from delivering a rate cut. On the other hand, Lowe said that credit conditions had tightened more than it had been required, it could be a signal to market participants that the Reserve Bank of Australia may ponder a rate decrease later this year. He concluded his speech saying that wealth effects, due to slumping house prices, were affecting consumption mainly through income expectations. If he is right, we ought to see a rise in the savings rate in the nearest future.
In turn, Bank of Japan’s Harada suggested that a sales tax hike (planned for October this year) might cause a recession and weaken inflation expectations. According to him the Bank of Japan must strengthen monetary easing without hesitation of the economy worsens, adding that rising rate may not necessarily steepen the yield curve. One may draw a conclusion that the BoJ is very unlikely to end its unprecedented loose monetary policy any time soon as it would push down price.
Meanwhile, the USDJPY seems to be en route to its important supply zone at around 114.3 from where bears might look for their chance. Source: xStation5
In the other news:
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Oil trades 0.6% lower after the API showed US inventories increased 7.3 million barrels last week, well above market expectations
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Michael Bloomberg announced he would not run for presidency in 2020
