Australian economy to post mixed report for Q4 2015, real GDP likely expanded

Australia's Q4 2015 real GDP is expected to have grown by 0.5% q/q and 2.6% y/y, as compared with 2.5%. The accounts are expected to give a mixed report for the Australian economy. The estimated 2.6% y/y growth is slightly below trend, which is estimated to be 2.75%. Lower rates and lower dollar are likely to be helping the economic activity, especially housing and service exports, and signs that consumers are spending on domestically sourced goods and services.

Moreover, the economic activity has been positive for jobs. Employment expanded 0.7% q/q and 2.5% over the year, much more than the population growth of 1.5%. Public demand is likely to have positively contributed to growth in Q4, expanding annual growth to 3%, as compared with a 2% subtraction in 2014.

However, there were strong headwinds that continued in late 2015. Business investment is expected to have contracted by 3.3% in Q4, on downturn in mining investment. Expected sharp declines in the terms of trade of 4.2% q/q and 13% y/y are likely squeezing incomes. Moreover, increasing supply and weaker demand from China have led to drop in commodity prices.

Australia's nominal GDP is likely to have expanded by just 0.1% q/q and 1.7% y/y, much below the historic average of 5.7% y/y. Furthermore, the housing market eased during H2 2015 as mortgage rates increased with certain negative spill-over effects.

These headwinds have impacted domestic demand, which is likely to have increased by 0% q/q and 0.3% y/y after declining 0.5% in Q3. The Reserve Bank of Australia will be very much interested in the information regarding the consumer, which is a major uncertainty. In Q3, consumer spending registered a slight momentum, growing 0.7% q/q and 2.7% y/y, with stronger jobs growth helping wage incomes and consumers slightly lowering their savings rate.

However, it is doubtful whether this momentum was continued in Q4. Consumer spending is expected to have increased 0.5% q/q, 2.4% y/y. Wages have further eased even if job creation has strengthened.