Can a tepid Australian GDP growth influence the RBA?

Australian Gross Domestic Product is expected to post a modest 1% yearly advance.
The Reserve Bank of Australia will monitor GDP figures before the September meeting.
Australian Dollar likely to extend its decline with the expected tepid figures.

Australia will release Gross Domestic Product (GDP) figures on Wednesday. The Australian Bureau of Statistics (ABS) is expected to report that the economy grew 0.3% in the second quarter (Q2) of the year and 1% in the twelve months to June. Annual growth in the first quarter printed at 1.1%. Should the expected 1% be confirmed, it will be the lowest pace of growth since the coronavirus-led recession in 2020.

What to expect from the Q2 GDP report

As previously noted, the Australian economy is expected to have grown by 1% in the year to June. But what does that mean for the Australian Dollar (AUD)?

Despite tepid growth, the Reserve Bank of Australia (RBA) is among those that maintain interest rates unchanged at multi-year highs. The Official Cash Rate (OCR) was lifted for the last time in November 2023 and currently stands at 4.35%. Even further, the RBA is nowhere near trimming interest rates as inflationary pressures have remained high.

And there is a good reason for it. The latest data available shows that consumer prices rose by 3.5% in the year to July, down from the 3.8% pace recorded in the 12 months to June. The RBA’s mandate is to keep annual consumer price inflation between 2% and 3%.

However, high interest rates usually translate into slower economic progress amid higher financial costs. To stimulate growth, the central bank would need to lower the OCR. The tricky thing is that boosting the economy is not within RBA’s mandate.

Theoretically, growth-related figures should not affect policymakers’ decisions. Nevertheless, they do. RBA officials will not acknowledge concerns on the matter but rather maintain the focus on inflation.

Meanwhile, underlying inflation in Australia increased throughout the first half of the year, boosting speculation the RBA could hike interest rates. Since the last meeting, inflation has eased modestly, and market players are willing to believe the OCR has peaked.

How can the GDP report affect the Australian Dollar?

The GDP report will be released on Wednesday at 01:30 GMT, and market participants will likely assess how the outcome could affect the upcoming RBA decision. Faster-than-anticipated growth will have a positive impact on the AUD as it will reflect not only economic progress but also spook fears of higher interest rates.

On the other hand, softer-than-expected progress could trigger multiple alarms. Not only will it push the AUD lower, but it will also fuel speculation the RBA should speed up the decision to trim interest rates, which will also negatively affect the local currency.

Valeria Bednark, FXStreet Chief Analyst, adds: “The Aussie is under strong selling pressure ahead of the announcement, with AUD/USD trading at around 0.6740. The pair fell amid mounting risk-aversion ahead of the release of United States (US) employment-related figures scheduled throughout the rest of the week. The US Dollar benefits from the dismal mood, which means that AUD/USD could easily pierce the 0.6700 mark with GDP figures below expected. Next support is located at 0.6660, en route to the 0.6630 price zone.”

Bednarik also notes: “Upbeat figures could trigger AUD near-term demand, but if risk aversion persists, gains could be limited. Even further, AUD/USD may resume its decline after the dust settles. The 0.6780 region is the immediate bullish target, followed by the 0.6810 price zone. Sellers may reappear around the latter, should the GDP post a modest beat. Finally, outrageous growth data could push the pair further up, with AUD/USD aiming to test the 0.6840 area.

Economic Indicator

Gross Domestic Product (QoQ)

The Gross Domestic Product (GDP), released by the Australian Bureau of Statistics on a quarterly basis, is a measure of the total value of all goods and services produced in Australia during a given period. The GDP is considered as the main measure of Australian economic activity. The QoQ reading compares economic activity in the reference quarter to the previous quarter. Generally, a rise in this indicator is bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.

Why it matters to traders?

The Australian Bureau of Statistics (ABS) releases the Gross Domestic Product (GDP) on a quarterly basis. It is published about 65 days after the quarter ends. The indicator is closely watched, as it paints an important picture for the economy. A strong labor market, rising wages and rising private capital expenditure data are critical for the country’s improved economic performance, which in turn impacts the Reserve Bank of Australia’s (RBA) monetary policy decision and the Australian dollar. Actual figures beating estimates is considered AUD bullish, as it could prompt the RBA to tighten its monetary policy.

GDP FAQs

What is GDP and how is it recorded?

A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.

How does GDP influence currencies?

A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.

How does higher GDP impact the price of Gold?

When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.

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