Australian Dollar: RBA Minutes Note Improved Growth in Trading Partners

The just-released RBA December meeting Minutes noted an improvement in growth in Australia's major trading partners in Q3, however, this was against a backdrop of below-par growth for the year and subdued activity across the global economy.

"Members commenced their discussion of the global economy with the observation that growth in Australia's major trading partners had picked up in the September quarter, driven by an increase in growth in some Asian economies following weakness in the previous quarter.” The minutes said. 

This contrasted with the previous minutes, which had focused very much on the negative impact of slowing growth in both China and rest of Asia, in particular in contributing to a fall in demand for Australian commodity exports.  

Overall, subdued global demand was still keeping commodity prices cheap, however, with Iron Ore, Australia's single biggest export declining in price to new lows in the past month. 

“Commodity prices, notably those for iron ore and base metals, had declined further over the previous month, consistent with ongoing indications that growth in global industrial production and trade volumes had remained subdued.”

China still gearing down

Economic conditions in China had not eased much, according to the RBA minutes, with the country's core manufacturing sector still contracting: 

"Conditions in the manufacturing and construction sectors in China had remained subdued and the output of many industrial products remained below levels recorded in 2014. There was overcapacity in some parts of the Chinese economy and conditions were likely to become more difficult over time for a range of unprofitable firms in these sectors.”

Chinese construction, which Australian commodity exporters profited from during the boom years, also appeared to be in decline: 

“Residential property prices overall had increased a little in recent months, but the stock of unsold housing was substantial in many cities and real estate investment had remained weak. This implied that it could be some time before there was a pick-up in construction activity.”

The domestic economy 

On the home front, the RBA acknowelegded the 3rd quarter had witnessed a steady improvement in key Australian economic metrics: 

“GDP growth looked to have picked up in the quarter, but was likely to have remained below average over the year.”

Business Investment appeared to be the one weak-spot int he economy as was the case in the previous minutes. 

On housing, the minutes continued to observe a slight decline in the previously over-heating Sydney and Melbourne housing sectors, and steady growth in the rest of the country. 

This was in line with thge RBA's aims to re-balance the housing market using macro-prudential policies to limit lending in the big-cities. 

On the data front, the House Price Index, showed a higher-than-expected 10.7% rise in Q3, compared to 10.2% forecast, and the 9.8% previous result, in 2014. 

On a qoq basis, however, the Index came out in line with analysts expectations of 2.0% compared to the previous quarter's 4.7% growth. 

A fall in unemployment was noted, as were the prospects for continued growth in employment, however, whilst seen as a positive sign it was a reduction from a rather high base, and the minutes highlighted the ongoing slack in the labour market as limiting wage growth, and therfore consumption and the propects for inflation. 

Mining vs Non-Mining 

In the previous minutes the board reported a pleasing growth in the services sector of the economy, and the December minutes continued to report growth in this key area of the economy, which Australia is attempting to boost in order to make it less reliant on commodities and heavy industry: 

“Conditions in the non-mining sector had also been supported by further growth in net service exports, consistent with the depreciation of the exchange rate.”

However in both Mining and non-minging the minutes reported a fall in investment spending, no-doubt due to fears about future economic prospects. 

Non-mining, however, had weathered this fall in investment, due to being less capital intensive. 

The take away - more easing still on the cards

Overall the consensus from the RBA was that although conditions had improved in Q3, the year as a whole would remain slow in comparison with 2014, and that the RBA must therefore remain open to the possibility of a further rate cut if the conditions necessitated it: 

“Based on the available data and the forecasts, the Board decided that leaving the cash rate unchanged at this meeting was appropriate. Members judged that the outlook for inflation may afford some scope for a further easing of monetary policy should that be appropriate to lend support to demand.”