Australia’s Economy Appears to be Ending the Year in Strong Shape

AUDGBP Bounces After Setting Lows for the Year

There was more good news as Australia’s Gross Domestic Product (GDP) announcement confirms the Reserve Bank of Australia (RBA’s) view yesterday that the economy is on the right track. AUD has a reasonably good day supporting analysts views that this could be one to watch in 2021.

Against the US dollar, AUD rose from 0.7380 to 0.7390 following the release of better than expected GDPR data from the Reserve Bank of Australia. An improving global economic picture continues to weigh on values for USD. The euro, mean while rose to 1.637, while the AUDJPY pair rose slightly, in an indication that perceived risk in the market may be dipping.

Promise of Good Times Ahead for the Australian Economy

All eyes were on Australia’s GDP announcements which beat expectations. Australia’s economy expanded by 3.3% in the third quarter of 2020, smashing expectations of a 2.6% rise by economists in a Reuters poll. Household spending surged by more than 7.9%, the most in the report’s 60 year history.

It was a sharp rise from the massive 7% contraction seen in the second quarter and shows the economy has successfully exited its first recession in 30 years. However, on employment the picture was darker.

Unemployment is still high, at 7% and the Central Bank believes it could continue to be 6% two years from now. It set a target of 4% to deliver ‘inflation outcomes consistent with 2.5%’ said RBA Chief Phillip Lowe in parliament. He suggested the RBA would hold off rising interest rates until inflation was in its 2-3% target and does not expect this to happen for another couple of years.

Lowe also indicated that the RBA is prepared to run the economy hot as it seeks to get over the pandemic and said it was open to more fiscal stimulus.

“The first step was to build the bridge to get us over the pandemic,” Lowe said in parliamentary testimony on Wednesday. “We’re coming down the other side of that, we’re kind of ramping off the bridge and now it’s building the road to recovery.”

Throughout the year, the RBA and the government have worked closely to support the economy with the injection of a new fiscal stimulus which included an interest rate reduction to 0.10% and an AUD$100billion bond buying program over six months. Lowe indicated he was open to extending the program.

Australia also faces mixed results from its relationship with China. The economy has benefited from the Chinese government’s own sets of stimuli to revive its economy. However, as Lowe acknowledged the relationship is strained. China has slapped tariffs on some Australian exports and is said to be refusing to take calls from Australian ministers.

Lowe admitted that there will be economic consequences and that the RBA is trying to work out what those will be.

Overall, the picture looks good. The economy has bounced back strongly from recession, household cash is on the up and the cost of borrowing low. Confidence is returning and with COVID 19 seemingly contained for the most part Australia is in good shape going into the holiday season.

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