Investors Unimpressed by Australian GDP Advance

Market Trends - 06/09/2017

Economic data for Australia has been relatively favorable over the last few weeks, underlining the positive strides being made in multiple areas.  For one, wage growth is finally starting to accelerate, a development that could put more disposable income in consumers’ pockets and help spur overall spending and household consumption.  Apart from rising wages, the unemployment rate dipped modestly during the last reading while labor force participation managed to climb.

However, the headline victories continue to overshadow other developments that might prove more relevant from a policy perspective.  For one, annualized inflation climbing at a pace of 1.90% continues to offset the gains in wages over the same period while remaining below the Reserve Bank of Australia’s targeted range of 2.00% to 3.00%.  The RBA highlighted this point during their monetary policy decision earlier in the week that saw officials opt to leave the benchmark rate unchanged at 1.50%.

Lower inflation is positive for household incomes, but creates headwinds for the Central Bank when it comes to raising rates.  Even though inflation is expected to rise alongside gradual improvements in overall economic activity, a return to the target range may not happen before the end of the year, especially when considering recent Australian dollar strength.  Any tightening of monetary policy vis-à-vis interest rate increases could propel the recent currency appreciation even further, potentially snuffing out inflation and hurting trade.

Trade is an area the Central Bank is keen to protect, especially after the significant contribution from the export economy to second quarter GDP growth of 0.80%.  The exchange rate gains over the last two months threaten to dent trade competitiveness during the second half of the year, meaning that no shifts in stance should be anticipated from the RBA over the medium-term.  Until growth and inflation climb, the Australian Central Bank will take no action, leaving the Australian dollar in the lurch if economic data disappoints over the near-term.



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