Australian Central Bank Could Loosen Monetary Policy Despite GDP Beat

NEW YORK (TheStreet) -- Australian GDP surged in the March quarter but the hidden specter of stalling domestic demand and stagnant income threatens economic growth. This could spur the Reserve Bank of Australia to loosen its monetary policy, which will have implications for Australian Dollar currency traders.

Australian year-over-year GDP growth beat market forecasts at 2.3%, leaving both currency traders and economists scratching their heads. However, the Australian economy faces additional headwinds as domestic demand stalls and incomes remain under tight pressure.

The surprise growth in Australian GDP represented more a rebuilding of inventory stocks as well as a slight increase in net exports. Net Exports increased by 0.5% during the March quarter and Inventories added approximately 0.3%. These increases helped to raise GDP but a flat domestic economy still signals problems ahead.

In contrast, Australian domestic demand stalled in the March quarter, causing annual domestic demand growth to fall to 0.8%. The economy continues to be effected by the lower global commodity prices, and lackluster demand from China, which has flowed through to domestic demand and consumption.

In practical terms, Australian households are likely seeing little growth in their incomes, while facing the prospect of a toughening job market. Australian wage growth remains exceedingly weak rising just 0.1%, nominally, in the March quarter. There is also a significant level of spare capacity within the labor market which is likely to put further pressure on income levels. Although consumer spending remains somewhat robust, the expectations of a softening economy and tough labor marker will inevitably flow through to the consumer consumption data in the next quarter.

In fact, Western Australia may already be in the initial grips of a significant downturn with the state facing an economic contraction of 1.8% in the March Quarter. Although not technically a recession, it likely feels like one to the people who rely strongly upon the mining sector for their livelihoods. Subsequently, the flow on effect of reduced confidence and consumption throughout the non-mining sector has been stark.

Business investment also continues to decline and seems to confirm the deflation of mining activity within the economy. Business investment has been reported as down 3.5% in the March quarter and reflects the lower total equipment investment, which also fell by 2.6%. This in turn has also affected public demand, which has weakened by 0.6%, and poses an additional headwind to the economy. Government tax revenues have also been disappointing, placing further pressure on the Australian budget.

Overall, the Australia economy is going to face some significant difficulties in the later part of the year. It is highly likely that the Reserve Bank of Australia will undertake a looser monetary policy and that further rate cuts in second and third quarters are a strong possibility. The agitation for a future rate cut is fairly evident considering the raft of elected figures, along with the RBA, suggesting that the Aussie Dollar still remains over-valued.

Ultimately, any rate cut or easing bias is likely to signal falls for the Australian Dollar, and see the commodity-based currency trading within the 0.7100 range. Although this may contribute to a growth in net exports, it does nothing to address the real risk of a lackluster Australian domestic economy.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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