width=240Release: Australia's GDP q/q (3rd Quarter)
Consensus Forecast: 0.8%-1.0%
Previous: 1.2%
Date/Time: 12/6/11 at 7:30PM ET (00:30 GMT, 12/7/11)

Australia's Growth Expected To Cool in 3Q:

Australia's economy is expected to show another solid quarter of growth in the 3rd quarter with expectations at the start of the week of a 1.0% increase. However, that would be a slower pace than seen in the 2nd quarter.

Economists downgraded forecasts for GDP growth following data released on Tuesday which showed the government cutting back on spending during the 3rd quarter, a taste of austerity as the government tries to meet its fiscal goals of bringing the budget back into balance.

From Sydney Morning Herald: Today's data showed government spending fell a steep 2.5 per cent in the third quarter to an inflation adjusted $78.9 billion. That was much weaker than anyone expected and implied a drag on economic growth of around 0.6 percentage points of gross domestic product (GDP), the biggest subtraction since 1999.

Other figures out on Tuesday showed net exports, or exports minus imports, lopped another 0.6 percentage points off GDP last quarter. And that was on top of a hefty 1.1 percentage-point hit from a rundown in inventories. This means the risk is GDP will be substantially lower than we have forecast, warned Scott Haslem, chief economist at UBS.

A poll by MNI shows expectations of 0.8% for the quarter, again the theme of weak government spending as a major reason for the gloomier outlook.

From MNI: The median of 15 economists polled by Market News International shows a forecast for 0.8% quarter-on-quarter growth in the September quarter, compared with 1.2% growth in the June quarter. On an annual basis the economy is expected to have grown strongly, up 1.9% versus 1.4% in September last year.

The growth in the Australian economy is expected to have slowed in the September quarter compared with the June quarter due to the drag from public sector spending, inventories and net exports while business investment and consumption is expected to have remained strong. A majority of economist made a downward shift to their forecast following the balance of payments data earlier Tuesday which showed a fall in government spending.

Whilst the (balance of payments) data was in line with our expectations, government spending fell more sharply than our forecast. We therefore now see modest downside risk to our forecast that tomorrow's Q3 GDP will print growth of 0.7% q/q (1.8% y/y), said ANZ economists.

On the plus side you have strong company profits and mining profits, though there was a rundown of inventories which should weigh on GDP.

From Sydney Morning Herald: A rise in company profits during the September quarter reflects high commodity prices and a peak in Australia's terms of trade, economists say. Company gross operating profits rose 4.8 per cent in the September quarter, official figures showed.

Gross operating profits in current prices and seasonally adjusted terms rose 8.8 per cent over the year to the September, the Australian Bureau of Statistics (ABS) said on Monday.

Estimated business inventories, in seasonally adjusted chain volume terms, fell 1.1 per cent in the September quarter after a downwardly revised 1.6 per cent rise in the June quarter. Economists were expecting inventories to have risen by 1.2 per cent in the September quarter.

RBA Cuts Rates Back-to-Back as Insurance Against Euro-zone Contagion:

The RBA has already responded to concerns about the economy by lowering interest rates by another 25 basis points yesterday, its second quarter-point reduction in as many meetings. That weighed on the Aussie following the release, as it fell against all of its main counterparts. However, throughout Tuesday's NY session it managed to claw back most of its losses against the USD, JPY, and EUR, all of its losses against the GBP, but was still weaker against the CAD.

The RBA wants to make sure it has insurance against the situation in Europe, as European leaders try to move to a final resolution of their sovereign debt crisis. While Europe only makes up about 9% of Australian exports, China, which accounts for about 30% is also slowing, with the PBOC moving to ease the reserve ratio requirement.


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What If? Scenarios & Implication on AUD:

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Therefore, some dampened expectations - the lower end of the status quo what-if scenario below - may be baked into the cake. While the AUD could be vulnerable following the RBA rate cut to a weaker than expected release, with the market perhaps leaning bearish on the release, a surprise to the upside would set the AUD up for a nice bounce short term bounce.

Stronger Than Expected - GDP Stronger than 1% (20%):

  • A stronger than expected release, with GDP rising more than 1% q/q would show that Australia's mining sector profits and capital investment is outweighing the slugging housing market and softer manufacturing and services sectors.
  • The RBA will continue to balance the overall economy. Currently that calls for lowering rates and easing borrowing costs for households, companies, and banks. But, if inflation from the mining sector rears its head, the RBA may hold be cautious with further rate cuts.
  • A positive surprise would be a nice counter to the RBA rate cut news and could help the AUD to further recover its earlier losses against the USD and JPY, and push its advantage against the GBP and CHF.

Status Quo - GDP at 0.7%-1.0% (45%):

  • A reading of 0.8% to 1.0% would be close to the median forecast at the start of the week. As we showed, there have been some pullbacks to those initial expectations, meaning a reading of 0.7% can still be considered close enough.
  • With the RBA already responding to global conditions with 2 rate cuts, growth in the bottom half of this range would still be acceptable.
  • AUD should feel pressured, but the weaker reading may be price in at this point. The AUD is going to continue to be dominated by general risk sentiment. Also, the expectations of monetary stimulus from the RBA should counter slightly softer GDP data.
  • This is a pretty wide range and the upper end (0.9%-1.0%) could still give the AUD a boost.

Weaker Than Expected - GDP 0.6% or Lower (35%):

  • A reading at 0.6% or below would likely be considered even worse than expected mid-week and shows that Australia's economy grew at half the pace of the 2nd quarter (when there was a bounce-effect from natural disasters in the 1Q).
  • Because changes to interest rates act with a lag, the RBA may be late the ballgame, though it has taken as pro-active steps as it could - though with an eye on Europe not its domestic economy.
  • With China slowing, the terms of trade for Australia may not be as favorable, but it will still power the overall economy in the next few years. China's demand for Australia's iron ore and coal have been pivotal for Australia's success and so that is more important in the medium term than even Europe's woes.
  • Such a reading should weigh  on the AUD and combined with a narrowing of the AUD's interest rate advantage as a result of the RBA rate cut could set the AUD for a spell of weakness against key crosses (AUD/CAD, AUD/NZD come to mind in an environment of risk appetite, and AUD/USD and AUD/JPY in an environment of risk aversion).
  • The employment change data mid-week would gain more significance to the AUD's direction.

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, AnalysisEducationVideosCharts, and other trading resources.