Australia’s economic growth surprisingly weakens in Q3, RBA likely to retain easing bias

Australia’s economic growth for the third quarter came in surprisingly much weaker than market expectations. On a sequential basis, the Australian economy shrank 0.5 percent in the third quarter. On a year-on-year basis, the economic growth came down to 1.8 percent from a downwardly revised growth of 3.1 percent in the second quarter.

Market projections were for the Australian economy to grow 2.5 percent on a year-on-year basis and 0.3 percent on a sequential basis. The Reserve Bank of Australia does not publish quarterly forecasts; however, its six monthly projections imply an expectation of annual growth of close to 3 percent in the third quarter.

While the recent data indicated towards a low outcome, the extent of weakness in today’s report is quite unexpected. The surprise has come from particular weakness in the income measure of GDP (-0.7 percent quarter-on-quarter) with small business profits down especially sharply, as well as widespread weakness in the production measure of GDP, noted ANZ in a research note.

Today’s released figures are likely to overstate the underlying weakness in the Australian economy. To a greater extent, the subdued result shows a confluence of downside surprises, some of which would be reveres in the third quarter. Housing is expected to recover given the number of work in the pipeline, resources exports should expand strongly given the ongoing expansion in LNG supply, and profits growth are expected to rebound underpinned by higher commodity prices and a pickup in small business profits, stated ANZ.

Furthermore, consumer spending, which contributes about 55 percent to the GDP, appears likely to rebound given the acceleration in retail sales in the past couple of months.

In all, the GDP report implies certain loss of momentum in the economy, in line with the deceleration in employment growth. Total business investment continues to be especially weak, with mining investment continuing to be a significant drag, housing construction is evidently at or close to a peak, while consumer spending growth has decelerated sharply from the rates seen in late 2015 and early in 2016.

On the policy front, the RBA is expected to be unhappy with the apparent loss of momentum in the economy; however, the post-meeting media release of yesterday implied that it also believes certain weakness to be temporary.

The tick-up in the economy wide measure of unit labor costs and wages in today’s report is encouraging; however, the core household consumption deflator continues to be particularly weak, said ANZ. Overall, the RBA’s easing bias is expected to be retained for certain time yet in spite of recent market enthusiasm for rate hikes, added ANZ.

At 06:00 GMT the FxWirePro's Hourly Strength Index of Australian Dollar was neutral at 8.91485, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 0.978778. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex