Australia: net exports subtract from GDP growth

Australia: net exports will subtract significantly from 4Q GDP growth

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More of the missing pieces of Australia’s 4Q GDP jigsaw were released this morning, including the current account data. The CAD suggested that net exports will subtract more significantly from fourth quarter GDP growth, by 1.3%-points, barring any significant revision to the third quarter numbers. Following the slew of economic data released today, which also included the fourth quarter profits and inventories numbers, 4Q GDP (due Wednesday) will likely print below our preliminary forecast of 1.1%q/q. The CAD widened by more than expected in the final three months of last year, coming in at –A$17.5 billion (J.P. Morgan: -A$16.9 billion, consensus: -A$17.2 billion) from A$16.2 billion in 3Q.

The fourth quarter numbers have few implications for tomorrow’s monetary policy decision, however. Our forecast is that the RBA will leave the cash rate unchanged, although our level of conviction is low. The case for a hike remains convincing, but it was strong last month when the RBA bucked unanimous expectations for a hike. The clouds of doubt around the consumer remain, as does the apparent anxiety about the tail risks associated with recent global events. So, on balance, we are sticking with our “on hold” call.

The CAD as a percentage of GDP widened further in 4Q (to around 5.5% of GDP on our estimates) and will likely continue to expand. The main reason is that, as RBA Deputy Governor Ric Battellino pointed out last week, Australia is investing more rather than saving less. Business investment is set to surge in 2H10 and mining investment will rise further as a share of GDP. Indeed, the A$43bn Gorgon gas project and the other A$116bn-worth of approved investment projects in Western Australia, for example, have added considerably to the swelling investment pipeline. According to Battellino, “with all this investment taking place, particularly in the gas industry, there is going to be a huge demand on resources, which can only be met by a higher exchange rate.” The CAD will, therefore, remain large.

As expected, the trade balance remained in deficit for the third straight quarter in 4Q, widening to A$6.1 billion from A$4.2 billion in the previous three months. Exports were down 1%q/q due to a tumble in exports of rural goods (-6%). Exports of non-rural goods were also down, but by a milder 1% over the quarter, despite a sharp drop in coal shipments (-10%); the latter owed mainly to lower prices. On the other side of the ledger, imports were up 2%q/q over the fourth quarter, with gains reported in imports of intermediate goods, capital goods, and of non-monetary gold. Imports of consumption goods dropped 4%q/q in both volume and value terms, which was surprising given that retail sales volumes bounced more than 1% in 4Q, suggesting that household spending was reasonably healthy.

The current account data also showed that the net primary income deficit increased 9% over the final quarter of 2009. Income credits increased 1%q/q, with the main contributor being a 5% rise in income on direct investment assets. Income debits increased 5% over the quarter thanks mainly to an 11% jump in income on direct investment liabilities.

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