Australia is set to release its latest GDP numbers on Tuesday night. This is always an important event for the currency markets, but with all the talk about the housing crisis down under, it’s likely to hit the market a little harder this time around.
There are good reasons to think this might be an unusually poor report, but that the economy might already be recovering. Mind you; this is for the fourth quarter, so even though the data itself is old, its importance to the markets is how it sets up prospects. Plus, it gives us a comparable for what’s going on in the Australian economy right now.
With the RBA projected to cut rates in the near future, this is a key bit of data that analysts are going to be putting into their equations when it comes to the timing of upcoming monetary policy.
Schedule and Expectations
The GDP data will come out on Wednesday at 01:30 CET (or Tuesday 19:30 EST), just after RBA governor Lowe gives a speech. Depending on how long he talks, the events could overlap.
The markets focus on the q/q data, though the y/y is generally more referenced when it comes to policy decisions. The consensus among economists is that Australia’s GDP grew by 0.2% in the last quarter, which would be a slip from the 0.3% of the third trimester. This would imply a cumulative growth of 2.2% for 2018 and a drop from the annualized figure of 2.8% recorded in September.
We should note that 2.2% is still lower than the expectations of the RBA, last expressed by the governor as “a bit below 3%.”
Let’s get the other event of the day out of the way: Governor Lowe speaking at the annual Financial Review business summit. This will start on Tuesday at 23:10 CET (or 17:10 EST) and is not expected to be specifically about monetary policy (it’s more of a “review”).
Without any policy mentioned, it would be a reiteration of the content of the SMP issued last month. Of course a deviation from the script would have an impact on the markets, but since we can’t read his mind, it’s hard to know ahead of time.
What we do know is the data released during the last quarter. This allows us to get a better handle on what we might expect from the markets, and the data as well.
With such a broad consensus among economists, we can expect that the market has been pricing in a softer GDP result for Q4. This sets us up for a potential relief rally if the data is within or above expectations. It also means that it’s harder for a break on the downside if the data disappoints.
Weaker Results, Better Future
Why is there so much agreement that the data will be weaker? Well, there are several factors. These include the break out of the housing issue, the problems relating to the trade war, a decline in global growth expectation which leads to less investment, and a slowing of capital flows from China.
On the plus side, however, the RBA continues to expect the economy to grow by 3.0% this year. Why? Well, some of the factors that lead to expectations of a lower result have resolved.
The drop in global markets that put pressure on financial growth in Australia as much as anywhere else, has dissipated. Caution was abundant over the knock-on effects from the trade war, but the situation has become something of the “new normal.” And that normalization has calmed risk aversion.
During the quarter, Australia continued to add jobs, despite business confidence hitting multi-year lows. This helps the case that economists might be in for a positive surprise with the data. Other factors include that PMI remained in growth territory (though declining), and consumer confidence remained high.
In the end, though, the importance of the data is in how it sets up expectations for future growth of the Australian economy. Better than expected results would help support the RBA’s case for growth. And, it may also do something to improve business confidence and outlook that has been suffering lately.