Worse lies ahead for Australia’s economy – FXWW Chatroom

Australia’s economy picked up by less than expected in the fourth quarter, and worse is likely to be ahead, given that the effects of a significant deterioration in the country’s terms of trade are only just beginning to be felt. We expect growth to slow much more sharply than most analysts are predicting in 2015.

GDP grew by a seasonally-adjusted 0.5% q/q in Q4, up from 0.4% in the previous quarter. This was below expectations (our forecast was 0.7%; the Bloomberg consensus was 0.6%). In y/y terms the economy expanded by 2.5%, down from 2.7% in Q3.

As was suggested by recent retail sales data, private consumption made a healthy contribution to GDP growth last quarter, rising by 0.9% q/q, while residential investment grew by 2.5%, after a 1.2% contraction in Q3. However, business investment contracted for a second consecutive quarter and net exports became a drag on growth after making a strong positive contribution in Q3.

The most important point, though, is that the full effects of the fall in prices for Australia’s commodity exports, and the corresponding deterioration in the country’s terms of trade, are still to feed through into the real economy. While a worsening terms of trade doesn’t directly affect real GDP (which excludes price changes), it will have an indirect effect as lower profits prompt firms to invest less and employ fewer workers. Indeed, surveys of investment intentions are suggesting mining investment is set to fall sharply over the coming year, and there is little sign that investment by non-mining business will fill the hole.

The upshot is that we expect growth to slow from 2.7% in 2014 as a whole to just 1.8% this year. If we’re right, then there is a good chance that Reserve Bank of Australia will cut rates to 1.5% and that the Australian dollar will weaken to US$0.70 from US$0.78 now. 

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