As on Wednesday 5th December, Australian dollar was seen to be trading at 73 US cents as against 81 US cents in the beginning of year, representing a steep fall of 10 per cent. The S&P/ASX 200 Index tumbled to a 23-month low at its opening and was down by 44.7 points, or 0.79 per cent, at 5668.4, at its close.
The dismal performance of Aussie Dollar and stock market is majorly attributed to economic growth figures missing the target expectations in the third quarter of 2018. Australian Bureau of Statistics’ figures reflected that nation’s GDP growth slowed sharply in July - September quarter, growing merely by 0.3% against the forecast of 0.6%, slowing from a 0.9 % expansion in the previous quarter. This is the weakest quarter performance since September 2016 quarter. With the growth rate of 2.8% in the year to September, economy is bound to miss the RBA annual growth forecast of 3.5%.
Household sector has proven to be a big blow to Australian economy in recent times with record-low wage growth, large run-up in household debt, subdued growth in gross disposable income, mere 2.4 % household savings rate (lowest since 2007) and unemployment rate of 5.1% at a six-year low.
We can expect GDP growth to slip further next year on account of growing pessimism around probable property bubble in Australian real estate market. The country is witnessing mounting household debt, lower interest rates and reduced household savings. Australian economy had undoubtedly shielded itself during major 2008 global financial crisis and had rather enjoyed consecutive periods of high growth rate over the years. However, for all the success that’s been seen in the past, it is believed that it will almost certainly experience an economic downturn.
Although China has accepted Donald Trump’s 90-day deadline to resolve trade tariffs issue, there is still weak outlook on this front. Australian economy is largely dependent on commodity demand from China, which could be impacted by growing tension between China and US over trade war. There is no denying the fact that country’s high growth trajectory is vulnerable to further slowdown if South China sea issue among Australia’s major trading partners is not addressed.
The US economy is booming with economic growth in excess of 4 per cent and unemployment at an 18-year low of 3.8 per cent. As part of monetary tightening measures, Federal Reserve has lifted interest rates twice this year and foreshadowed more rate hikes to come (though the same now seem to come to an end). Given higher rates, investors preferred to invest in US being the most liquid capital market in the world, which is putting downward pressure on other currencies including Australia. In contrast, it has now been 28 months since the RBA has adjusted its monetary policy and has left the cash rate on hold at 1.5 per cent on Tuesday.
In the scenario of global volatility and dismal performance by domestic household sector, Australian economy is bound to be surrounded by poor economic growth, market fall and dollar dip.
It is now to be seen that how RBA will manage the cash rate going forward.
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