Australia’s Q4 terms of trade decline sharply, Q4 GDP growth forecast revised down

Australia's net exports for Q4 remained flat after it contributed 1.6 percentage points to the GDP in Q3. Net exports are trending higher, but with volatility quarter to quarter. The Q4 net exports data was weaker than forecast. Export volumes expanded 0.6% in Q4, slightly lower than the forecast. Meanwhile, services recorded a strong growth of 1.6% q/q to be 8.3% higher than one year ago. This highlights that the lower Australian dollar is giving a boost to the economy.

Meanwhile, import volumes rose surprisingly by 0.6%, as compared with the forecast of 0.5% fall. Imports rose moderately 1.2% in the past year, reflecting the effect of a lower currency and weak domestic demand.

Australia's terms of trade declined sharply by 3.2% and 12%y/y, as prices of commodity fell due to increasing supply and weaker demand from China. The decline in terms of trade is a significant negative income shock to the economy of Australia, limiting spending power.

Meanwhile, public demand in Q4 grew 1.4%, reversing the decline in Q3 and more than the expectations of a 0.7% growth. The volatility was caused by investment, which started the 2015-2016 financial year on a softer note in Q3 and a recovery in Q4.

"We have revised down our forecast for Q4 GDP to 0.3%qtr, 2.5%yr, lowered from 0.5%qtr", says Westpac.

The downward revision to the GDP forecasts takes into account the downside surprises from net exports and inventories. Domestic demand for Q4 is expected to have remained weak, rising just 0.1%. The downturn in mining investment continues to be the main headwind, as total business investment is expected to have contracted by 3.5% in the quarter. The decline in the terms of trade will contribute to a dull reading for nominal GDP, which is expected to have grown 0.1% q/q and 1.8% y/y.

Meanwhile, consumption is expected to have grown 0.5% in Q4, moderating from a growth of 0.7% in Q3. Lower Australian dollar is a positive factor for the economy that is boosting the services sectors. It is evident from strong export growth. Home building activity is being stimulated by lower rates. Furthermore, job creation was solid in 2015, increasing 0.7% q/q in Q4.