Australia Q2 GDP beats at 0.4%, keeps September rate hike in play
The stronger than expected GDP print has pushed market pricing for a September RBA hike to 57 percent, up from 48 percent beforehand, while a November move remains more than fully priced. AUD/USD ticked higher on the release, trading above 0.7150, as the beat on both quarterly and annual growth reinforced the case for further tightening. With annual growth at 2.1 percent still running above the RBA’s estimated 2 percent non-inflationary speed limit, and underlying trimmed mean inflation stuck at 3.6 percent, the data leaves the central bank with limited room to pause. The composition of growth, EV driven consumption and vehicle imports offsetting weaker business investment and softer services trade, points to a domestic demand base still absorbing capacity despite obvious drag from Middle East linked fuel and travel disruption.
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Australia’s economy grew faster than expected last quarter, and that’s now the RBA’s problem to manage.
Summary:
- Australian Q2 GDP rose 0.4% q/q, beating the Reuters poll estimate of 0.3% and up from 0.3% in Q1
- Annual GDP growth came in at 2.1% y/y, above the 1.8% forecast but down from 2.5% in Q1
- Final consumption expenditure rose 0.5% q/q, up from 0.3% prior
- Gross fixed capital expenditure fell 0.3% q/q, reversing a 3.0% gain in the prior quarter
- The GDP chain price index fell 0.6% q/q, down from a 0.8% rise previously
- Markets raised the odds of a September RBA rate hike to 57% from 48% following the release, with a November hike more than fully priced
- AUD/USD rose to trade around 0.7150 to 0.7151 following the data
- ABS said Middle East conflict disruption cut fuel consumption and domestic and international travel, while EV purchases jumped 10% in the quarter, adding 0.3 percentage points to growth
- Household consumption added 0.2 percentage points to growth, net exports added 0.1 percentage point, and public demand added a further 0.1 percentage point
- Business investment fell 0.5% after a first quarter surge tied to data centre machinery and equipment
- Imports of goods rose 2.4%, led by cars and planes, while services imports fell 4.9% on disrupted overseas travel; exports rose 0.8% on higher coal production
- Annual inflation eased to 3.5% in July, though the trimmed mean measure held at 3.6%, both above the RBA’s 2 to 3 percent target band
Australia’s economy grew faster than expected in the second quarter, data from the Australian Bureau of Statistics showed on Wednesday, giving the Reserve Bank of Australia further grounds to consider another rate hike even as underlying momentum continues to cool. Real GDP rose 0.4 percent quarter on quarter, above the Reuters poll estimate of 0.3 percent and up from 0.3 percent growth in the first quarter, while annual growth came in at 2.1 percent, comfortably ahead of the 1.8 percent forecast though down from 2.5 percent previously.
Markets responded quickly to the beat, lifting the implied probability of a fourth RBA rate hike at its September meeting to 57 percent, up from 48 percent before the data, with a move by November now more than fully priced in. The Australian dollar firmed modestly on the release, with AUD/USD trading around 0.7150 to 0.7151 in the aftermath. The annual growth figure remains above the roughly 2 percent pace the RBA judges the economy can sustain without generating additional inflationary pressure, keeping the central bank’s task of balancing growth against price stability firmly in focus.
Grace Kim, the ABS’s head of National Accounts, said the Middle East conflict has visibly influenced household spending patterns, with falls in fuel consumption in response to elevated prices and reduced domestic and international travel. That drag was more than offset by a striking 10 percent jump in vehicle purchases, driven largely by electric vehicles, which alone contributed 0.3 percentage points to the quarter’s growth. Household consumption overall added 0.2 percentage points to GDP, with net exports and public demand each contributing a further 0.1 percentage point.
Business investment told a different story, falling 0.5 percent in the quarter after a surge in the first quarter when companies poured spending into data centre machinery and equipment, suggesting some of that earlier investment pulse has now faded. Trade flows also reflected the conflict’s disruption, with imports of goods rising 2.4 percent on higher purchases of cars and planes, while services imports fell 4.9 percent as overseas travel was curtailed. Exports rose 0.8 percent, supported by higher coal production.
The growth beat lands against a backdrop of inflation that remains uncomfortably sticky for the RBA. Annual consumer price inflation eased to 3.5 percent in July, but the trimmed mean measure, the central bank’s preferred gauge of underlying price pressure, held at 3.6 percent, with both readings still above the RBA’s 2 to 3 percent target band. The central bank has already hiked rates three times this year in an effort to bring inflation under control, and Wednesday’s data, showing growth running hotter than expected even as core price pressures persist, leaves the case for further tightening largely intact heading into the September meeting.
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RBA next meeting:
This article was written by Eamonn Sheridan at investinglive.com.