There’s no rest for the markets. Immediately after the interest rate decision, we have the next major event: the GDP numbers for the first quarter.
After that, we will then be getting the trade balance. Finally, the home loans data will be coming out to round up one of the busiest weeks of the quarter for the Aussie.
The GDP number is, of course, quite important. But, it’s also important to contextualize the data.
The first quarter ended over two months ago. Therefore, the data isn’t fresh. So, the potential effect of the GDP data ought to be considered in light of recent trends.
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What to Look Out For
The consensus of expectations is for Q1 GDP to rise by 0.4% on a quarterly basis. This would be a doubling of the pace registered in the prior quarter. On an annual basis, this would push GDP growth to an anemic 1.8%, down from the 2.3% accumulated in the prior year.
This would also be the worst performance since Australia managed to power through the financial crisis (often billed GFC in Australian press) following the collapse of the subprime mortgage market.
More worrying is that, on a per capita basis, Australia registered a recession at the end of the year. This result would imply that it continued into the first quarter. By comparison, the RBA projected 0.6% GDP growth in the quarter. The farther the miss is from the bank’s estimates, the more likely that there would be action from the central bank.
It’s Not All Negative
Despite the more pessimistic indicators, Australia still managed to do well on the trade front, registering the largest trade surplus in history. This will contribute to the GDP, but given that it was partially aided by the slide in imports, that contribution might be diluted.
Public sector spending still continues apace, at least in the first quarter. While that might help prop up the Q1 figure, the prospect going forward is less optimistic.
There is a growing divide between public and private spending. While the government continued to maintain demand, private capital expenditures have remained largely stagnant. And, a survey of intentions shows only modest interest in spending.
It Might Be a One-Off
One of the factors to consider is that there was considerable political uncertainty during the quarter. First was the debate regarding the budget, and immediately after the election.
The opposition is leading in the polls and campaigning on raising taxes as well as regulatory restrictions to combat climate change. However, many investors decided to wait until the outcome of the election to decide their investment strategy.
Also, up until the end of the quarter, the consensus was that the RBA was not likely to cut rates. In fact, there was even a bias towards a hike. Now that the RBA is decidedly dovish in its outlook, there is the potential stimulus to help spur investment going forward.
Trying to find the silver lining
Recently, we had the release of inventory data. This showed a surprise increase and illustrates the issue with the latest data. While that helps support expectations for an increase in the GDP, the problem is why inventories increased: the lack of demand.
Poor demand can lead to lack of growth in inflation. Growing inventories and poor retail sales are the classic sign of a recession. The usual excuse of attributing lack of growth to trade concerns has a slight problem: Australian exports continue to perform lustily thanks to high iron ore prices.
The Market Reaction
With the market pricing in a quarterly GDP number of 0.5%, we’d expect more potential for volatility if the result came in outside the 0.3% and 0.6% range. The bottom of the range comes from the least optimistic analysts, and the 0.6% is the rosy outlook from the RBA.
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