Whats Buzzing on Economic Front; Are there Any Bright Spots?

Summary

  • While March Quarter GDP data depicted 0.3% dip, household saving ratio increased to 5.5%, and household final consumption expenditure reduced during Q1.
  • AUD/USD pair continues to stay afloat, hovering near three-months high on the back of broad market optimism, a weaker US Dollar, and a positive PMI data indication for Australia.
  • Retail Trade reported 17.7% dip in April driven by store closures and fall in hospitality and lifestyle retailing.
  • Economic outlook needs to be gauged closely amidst Australia gradually reopening its economy, while US-China spat and AU-China trade relations also make an impact.

While Australia welcomed its weak GDP figures released by the ABS on 3 June 2020 for the March-quarter 2020- a rather challenging and eventful period for the country, retail scenario for April hasn’t offered any positivity either. Moreover, current account surplus dipped by $1.6 billion to $8.8 billion in April. However, market players are eyeing positivity in currency market with the AUD/USD hovering near three-month high.

Australian Economy Contracts 0.3% in Q1

The GDP fell 0.3 per cent in seasonally adjusted, chain volume terms in Q1 and the annualised pace of economic growth slowed to 1.4 per cent through the year, below the previous period's 2.2 per cent.

Read: RBA Keeps Cash Rate Static at 0.25%, Maintains Upbeat Tone in Monetary Policy Meet

GDP data released by the ABS measures the total value of all goods and services produced within Australia during a given period of time and considered as an overall measure of the economic activity and health. Economic growth puts an upward pressure on the AUD, while a fall in the GDP growth is considered as negative (or bearish) for the AUD.

As per ABS, the Terms Of Trade increased 2.9 per cent while the Household Saving Ratio marked an uptick to 5.5% from 3.5%. Besides, the government continued to increase spending during the quarter to deal with the bushfires and manage the coronavirus pandemic.

For the quarter, the contribution of Public Demand to GDP was only 0.3 percentage points, driven primarily by a 1.8 per cent increase in government final consumption expenditure while the Private Demand contribution to the GDP contracted 0.8 percentage points on account of lower household final consumption expenditure.

The social distancing restrictions on free movement of people also led to household spending declining significantly by 12% on services, particularly in areas with stringent restrictions such as such as air travel (domestic and international), hotels, cafes, recreational and cultural places. On the other hand, consumer spending on essential goods remained high, especially in food and pharmaceuticals segments.

The March Quarter 2020 GDP growth is the slowest through-the-year growth recorded since September 2009, a time when Australia and the world were suffering through Global Financial Crisis, as per Bruce Hockman, Chief Economist for the ABS. It has a been a particularly challenging period for Australian economy as the country had to bear a number of calamities such as bushfires, other natural disasters, followed by the outbreak of the coronavirus pandemic which subsequently led to stringent restrictions and social distancing measures. As the businesses, manufacturing and services sector suffered, the economic activity contracted. Thus, the market participants were indeed anticipating weak GDP numbers and economists expect a recessionary scenario for the global economy.

Nevertheless, Australia saw the government and the Reserve Bank of Australia intervening to the rescue of the adversely impacted businesses via introducing huge economic stimulus packages which has largely helped in keeping the economy buoyant and maintaining jobs.

AUD/USD Trading At Three-Months High Amid Broad Market Optimism

Interestingly, the AUD/USD mildly dropped after the release of the Q1 GDP data, and is currently trading close to three-month high amidst broad market optimism, a weaker US Dollar, as well as a positive Purchasing Manager’s Index (PMI) data for Australia.

Thus, the Australian dollar is continuing to march upward even as the GDP data disappointed the market, coming on top as one of the strongest currencies these days.

The Commonwealth Bank Services PMI data for May 2020 has indicated that the seasonally adjusted Commonwealth Bank Composite Output Index rose from 21.7 in April 2020 to 28.1 in May 2020, demonstrating a slower, but still severe decrease of private sector business activity as measures to contain COVID-19 continued to hit demand. Even then, the business confidence improved markedly and continued to boost with the expectations of a further easing of containment measures.

This demonstrates the sheer resilience of Australian economy as compared to what other key economies are going through amidst the global health and economic crisis.

Furthermore, the Aussie dollar has also been gaining momentum amidst the hopefulness of the US Health official around the vaccine for treating coronavirus (COVID-19) and Australia’s apparent success in efficiently containing the virus. Besides, Australia has started to strategically reopen its entire economy and plans to do the same via a three-step plan as announced by the Australia’s Prime Minister Scott Morris.

Under the first stage, small non-work gathering of up to 10 people would be allowed along with reopening of retail shops and small cafes. The travel between states would also be resumed and funerals and weddings of up to 30 people would be permitted. At the same time, people are still being encouraged to work from home and workplaces to develop Covid-19 safety plan. Public transport is also recommended to be avoided during peak hours.

The step two would allow for slightly larger non-work gatherings of up to 20 people and more and more companies will be able to reopen their businesses and workplaces while tight restrictions would be placed on higher-risk activities. Lastly, with a commitment to reopening of businesses and the community with minimal restrictions, step 3 will see the government easing out further restrictions and allow for non-work gatherings of up to 100 people and employees would be able to return to work underpinned by COVIDSafe ways of living.

Good Read: RBA: Negative Interest Rates Extraordinary Unlikely, Less Severe Economic Downturn Expected Ahead

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