Market Musings: AUD: Temporary GDP hammer blow?
The now dated Q3 Australian GDP has exerted downward pressure on the AUD (now ~$0.6415) with the already sluggish underlying growth picture undershooting analysts forecasts. This won’t surprise businesses at the coalface, particularly those in goods-producing and interest rate sensitive industries, with the GDP figures once again showing that higher mortgage rates and elevated prices are constraining private sector activity. The Australian economy expanded by 0.3% in Q3. As a result, annual growth decelerated to just 0.8%pa. Outside of the COVID lockdowns this is the slowest annual pace since the early-90’s recession.
The detail in the national accounts can be sliced several ways, but a takeaway from the Q3 figures is that the anticipated pick up in private demand has yet to manifest. Government spending, which was boosted in the September quarter by defense-related spending, infrastructure investment, and energy assistance rebates, remains a growth driver (chart 1). But outside of that momentum is stuck in low gear with households continuing to hold back in a lot of areas (especially across ‘discretionary’ categories) despite moderating inflation and with the Stage 3 tax cuts flowing.
The population mirage also remains in place. This is mechanically preventing the economy from tipping into a ‘technical recession’; however, it masks other issues. Stripping out the jump up in the population the economy continues to struggle with per capita GDP falling for the 8th time in 9 quarters. GDP per capita is now 2.1% below its mid-2022 peak (chart 2). Over the same period the aggregate economy has grown by 3.4% thanks to more people floating around day-in day-out. Recall, GDP is a volume measure and the larger population is supportive for activity. This is also an important input in the monetary policy debate. While economic growth rates get market, media, and political attention, for the RBA the level of activity, specifically compared to supply, is what matters. This is what influences inflation and there is an ongoing mismatch with the larger population, coupled with high levels of activity in public demand and labor-intensive services sectors keeping unemployment below ‘full employment’ (charts 3 and 4).
For the RBA the sluggish momentum shouldn’t be that much of a surprise, though it may be a little jittery about whether the anticipated uptick in growth it is looking for over late-2024/2025 will materialise. From our perspective things look to have gotten off to a better start in early-Q4. Our forward-looking ‘private demand tracker’ suggests the growth pulse may quicken from its rather meagre run-rate over the next few quarters (chart 5). In our mind, this indicates that the ‘soft landing’ the RBA has been striving for remains on track, particularly when also considering that broader price pressure gauges contained in the GDP report such as the domestic demand deflator and unit labour costs cooled as demand and supply rebalance (chart 6).
We doubt that the Q3 GDP data will meaningfully shift the needle and drastically bring forward the timing of the first RBA interest rate cut. As mentioned, there is an important distinction between growth rates and activity levels. We continue to think that until more cracks appear in the labour market and/or core inflation shows it is truly on a path back into the 2-3% target band the RBA will hold firm. In our opinion, this points to the start of a modest and limited RBA easing cycle still being a story for late-H1 2025. With respect to the AUD, as outlined before, we believe that the enacting of the Trump policy agenda of trade tariffs, greater fiscal spending, and steps to curb US immigration will be USD supportive and this in turn should keep the AUD in the mid-$0.60s over coming quarters (see Market Musings: Trump 2.0 & the AUD). The upcoming US jobs report (released Friday night AEDT) poses an added near-term downside risk for the AUD, in our view.
That said, we don’t think the fundamentals have moved that far to justify where the AUD currently is or support it falling much further from already low levels. In our judgement, a fair degree of ‘bad news’ already looks discounted with the AUD trading at a ~4 cent discount to our ‘fair value’ estimates (chart 7). Added to that, over the past decade the AUD has not sustainably traded much below where it is (it has only been sub-$0.6450 5% of the time since 2015) because of Australia’s high terms of trade and improved trade position (chart 8). These dynamics remain in place. As the dust settles we also believe that the diverging fundamentals between Australia and others should ultimately be AUD supportive against currencies like the EUR, NZD, CAD, GBP, and CNH over the medium-term with domestic growth projected to accelerate from here and with yield spreads shifting as the RBA lags its counterparts.
Peter Dragicevich
Currency Strategist - APAC
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