What to Expect from Australia Q2 GDP

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The week of major data out of Australia continues. Now with the RBA rate decision out of the way, the next major bit of data that could move the currency is the GDP figure.

Although analysts have said it’s not likely to impact monetary policy decisions, it still can have indirect implications for the currency development.

While still an important economic indicator, it should be noted that this comprises the period mostly before the first interest rate cut. While monetary policy could have some effect, since there was such a broad consensus that the RBA would act, it’s still what we might call “old” data in the current scenario.

Forex traders might not want to figure in too much of a market reaction to this data.

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The First Reports

Before we get to the GDP figure, we could get some reaction from the forex markets to the PMIs coming out a couple of hours earlier.

We already got the Manufacturing PMI for August on Monday, and it came in at a disappointing 50.9, continuing the decline. Now we get services PMI, which we can expect to remain in contraction at 49.2. This would keep the composite figure in technical contraction, since the services sector is a larger component of the economy.

The divergence between the two PMIs indicates that Australia has been able to at least tread the water in terms of industrial production, but that consumer sentiment is weakened. Services PMI had been slowly recovering during the first half of the year, but took a dive following the back-to-back interest rate cuts.

What We Are Expecting

In terms of an immediate market reaction, we’ll be looking at the quarterly figure. But, swing traders might be more interested in the annualized growth rate. The RBA does not have the mandate to support the economy beyond keeping inflation in line. And that is why analysts say this figure isn’t likely to affect forward guidance from the central bank.

The consensus is that GDP will show an anemic quarterly growth of 0.5%. This would be a marginal improvement above 0.4% in the prior quarter. A result like this would imply a slowing in the pace of growth for the annualized rate to 1.4% compared to 1.8% in the prior quarter. This would be the worst performance since the global crisis of 2008-09.

The Trends and Markets

There is a pretty broad consensus that Australia had a weak quarter. Therefore, a substantial miss would be necessary to jog the markets. On the other hand, this means that a surprise to the upside might give a relief opportunity for bulls, providing more upside risk for the event.

For forex traders, there are two factors that are especially relevant: Inventories and China. ABS statistics released on Monday showed a substantial drop in inventories. And this would likely drag down the overall GDP number.

Retail sales were largely healthy in the period. Therefore, the drawdown implies slowing productivity, rather than a drop in demand. This could be a hopeful sign that even if this quarter is lower than expected, the next quarter could revert as businesses restock.

The External Issues

The second factor is China, especially in regards to commodities. Miners posted record profits during the period (and were one of the largest reducers in inventories). Resource extraction had growth during the period while the rest of the economy remained largely flat. We could get further confirmation of this trend on Thursday with the publicacion of the trade balance.

Weaker internal factors, as seen with the services PMI and ABS figures, would imply increased reliance for growth on China. A worrying proposition considering trade war escalation is expected for the rest of the year.

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