TD Securities: The RBA is facing a dilemma

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Australia recorded it largest trade surplus on record in December, jumping to a whopping $3.511 billion, according to data released by the ABS on Thursday.

Even with that outcome, something that exceeded even the most bullish forecast offered by an individual economist, Annette Beacher, chief Asia-Pacific macro strategist at TD Securities, reckons the trade report has created a dilemma for the Reserve Bank of Australia (RBA).

While in dollar terms the trade surplus was massive, Beacher says that is unlikely to translate to higher real GDP growth in Q4.

“Export volumes are likely neutral to slightly positive, and combined with import volumes likely to lift by around 1.5% for the quarter, we see trade slicing up to 0.25 percentage points off GDP,” she says.

“Our December quarter GDP tracking is +0.4%, not exactly a convincing rebound from the September quarter shock –0.5% decline.”

The dilemma, says Beacher, is that just as the weaker commodity prices led to strong trade and GDP volumes in prior years, an opposite outcome may now occur with strength in commodity prices be accompanied weak volumes growth, potentially eliminating a key growth component in GDP.

That wouldn’t a great outcome should it eventuate, particularly with household consumption softer than normal right now and with the boost from residential construction also starting to ebb.

With net-exports unlikely to contribute to Q4 GDP in her opinion, Beacher says it is nearly mathematically impossible to forecast GDP growth to match the RBA’s November projections for real GDP growth, suggesting the RBA could revise down its forecast for June 2017 GDP
growth in next week’s statement on monetary policy (SOMP) by as much as 1%, taking it from 2.5% to just 1.5%.

While she says this could see markets begin to price in the likelihood of a further near-term rate cut from the RBA, she says the focus should remain on inflation. And, on that front, she expects it’ll start to accelerate in the period ahead.

“We are still of the view that higher inflation lies ahead, not lower,” she says. “(The) Melbourne Institute monthly inflation gauge accelerated over November and December and global upstream pressures are building, especially from China.”

In the RBA’s SOMP released on Friday next week, Beacher says that the near-term inflation profile will remain unchanged with underlying inflation remaining below the RBA’s 2-3% target band until at least mid-next year. However, the RBA will also offer a new forecast for June 2019 in this document, and could prove to be influential.

“Will underlying inflation begin edging towards mid-target of 2.5%, or remain flat at the bottom of the target range at 2%?,” she says.

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