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Australian growth lifts Aussie dollar, but how long for?

The Australian dollar rose as gross domestic product came in far stronger than expected, but it ran into heavy selling at US$0.73. Australia’s economic outlook is still mired in uncertainty, and further rate cuts can’t be ruled out.

Australian stock exchange data board
Source: Bloomberg

Australian first-quarter gross domestic product (GDP) rose 3.1% on the year and 1.1% on the quarter, well above economists’ expectations for gains of 2.8% and 0.8%. The market implied probability for an August rate cut by the Reserve Bank of Australia (RBA) fell to 45.1% in the wake of the figures, from 54% a day earlier. The Aussie dollar at one point rallied back up to US$0.73, but saw a strong bout of selling at that level.

AUD/USD price chart action

Australia has now seen three very strong quarters of real GDP growth in a row, but the respective drivers of growth in those quarters have been varied. This raises questions about which sector of the economy can be counted on to support growth at these levels. Net exports did all the heavy lifting for the first’s quarter 1.1% quarter-on-quarter increase. Net exports added 1.1% alone and consumption added 0.5%, helping cancel out the drag from capital expenditure and the statistical discrepancy (the difference between GDP and Gross Domestic Income).

Australia real GDP contribution

Arguably, the impressive contribution from net exports was primarily driven by China’s massive increase in stimulus in the first quarter. China saw the biggest surge in credit growth in the first quarter since the first half of 2013, and much of that credit went into the industrial and real estate sectors, both of which are key drivers of commodity demand. Correspondingly, there was an incredible run up in commodity prices associated with the stimulus, and Australia, as a major commodity exporter, was a huge beneficiary of this.

But early indications of China’s second quarter activity appear to show stimulus activity slowing noticeably. Alongside this, we have seen the Chinese government release an important op-ed from the ‘Authoritative Person’ on 9 May criticising precisely this sort of debt-driven investment activity.

China total social funding

Australian data has been somewhat contradictory with strong GDP growth and very weak inflation. Employment growth has also continued to be robust, but much of it has been contributed by part-time jobs while full-time jobs have continued to decline over the past few months. Nominal GDP is now starting to diverge dramatically with real GDP, underlining the RBA’s concerns over low inflation. The GDP deflator declined 1% year-on-year, its biggest decline since the first quarter of 2015. This has rarely bode well for the economy. It also points to the issues for Australian companies trying to grow earnings when nominal GDP is so low.

Australia GDP growth year-on-year

The weak inflation outlook is a key factor for the RBA, which runs a strict inflation targeting framework. The significant weakening in consumer price index growth in the first quarter prompted May’s rate cut. The massive weakness seen in all of the RBA’s core CPI measures in the first quarter bode ill for inflation in the economy going forward. We are quite likely to see another weak CPI number in the second quarter, and this is why we continue expect the RBA to cut rates at its August meeting and probably follow that rate cut up with another in December. As such, we are expecting the Aussie dollar to decline to US$0.65 in the third quarter and drop below this in the fourth quarter.

Australia CPI measures

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Denne informasjonen er ikke utarbeidet i samsvar med regelverket for investeringsanalyser, så derfor er denne informasjonen ansett å være markedsføringsmateriale. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder. Se fullstendig disclaimer og kvartalsvis oppsummering.

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.