The International Monterey Fund released its World Economic Outlook report this week and the signs were not good for Australia.
Following on from China’s shock and disappointing results on Monday in which Exports for March slumped 25% from February, and Imports dropped 22.7% provided a huge hit to the Australian Dollar (AUD) on Monday losing over 1% during the Australian session against the majors of the USD, GBP and EUR.
At the same time China’s trade balance results were released which were just as shocking, dropping from $40.20B to just $3.08B which provided a real shock to the markets and they have not fully recovered as yet. Following on from these results China’s growth rate is now expected to be 6.8% for 2015 which is a sharp decline on the 7.4% recorded for 2014. Further bad news for the Australian Economy is that the 2016 outlook has now dropped to 6.3% which would be the slowest pace in two decades.
Whilst the slowdown was not a huge surprise, it comes at a time when Australia is suffering from a slump in commodity prices. “The downturn in the global commodity cycle is continuing to hit Australia’s economy, exacerbating the long-anticipated decline in resource-related investment,”the report states.
This is something that many economists are expecting the Government to take into account when delivering next month’s fiscal budget. We have seen Iron Ore prices drop from $180 a tonne in 2011 to $50 a tonne yesterday, which Prime Minister Tony Abbot commented on at a business lunch in Sydney this week “Since last year’s budget, collapsing iron ore prices and the subsequent write-down in tax receipts have already driven a cut in government revenue of more than $30 billion over four years,” he said.
Commsec’s chief economist Craig James said it’s “business as usual” for the Australian economy with growth heading back towards pre-GFC levels. “People have to get used to the fact the Chinese economy will slow down. That’s just a fact of life. With any growing economy once you become among the ranks of largest in the world you’re not going to be able to sustain growth rates of eight, nine, ten per cent. It’s going to come down to something like the US, Europe, Japan, Australia,” he said.
The AUD/USD exchange rate continues to range between a low of 0.7567 on Wednesday after being as high as 0.7737 on Friday before the release of the Chinese Data on Monday. Overnight saw the release of US Industrial production which fell 0.6% in March, twice what the market was expecting and after the release of this data we then saw a drop in the USD and the AUD hit a high of 0.7701 briefly before dropping back slightly to be trading at 0.7679 at 0700 AEST this morning.
Today see’s the release of the AUD Employment Change, which is expected to remain on hold at 6.3%. Later in the evening sees the release of some USD data including the USD Initial Jobless Claims which are forecast to remain very similar to last week’s results of 281K. Following on from this will see the release of the Philadelphia Fed Results for April which are forecast to report a 1 point increase from March. The Fed report focuses on the outlook and business condition in the manufacturing sector.