Australian GDP Disappoints In First Quarter After RBA Talks Down the Aussie

The Australian economy expanded slower than expected in the first quarter reports out late Tuesday showed. The report comes just one day that the Reserve Bank of Australia, the nation's central bank, talked down the currency as the bank left open "scope for further easing" should the economy worsen.

Slower First Quarter

In the first quarter, Australia's economy expanded 0.6 percent which missed economist forecasts of a gain of 0.7 percent for the quarter. The rate of growth was equal to that in the fourth quarter when the economy expanded 0.6 percent.

On an annualized basis, the economy expanded 2.5 percent, slower than the anticipated gain of 2.7 percent. In the fourth quarter, the economy expanded at a 3.1 percent clip, showing that the economy has slowed over the past quarter and year.

Manufacturing Weakness

Manufacturing output declined 0.8 percent in the quarter as construction spending fell 2.1 percent. The weakness in these sectors were major contributors to the weaker data. The data also reflects the loss of 1,200 manufacturing jobs in the quarter when Ford F decided to cease operations at a plant in Australia and move elsewhere.

Exports did rise 1.1 percent in the quarter as the economy continued to sell raw materials to China and other economies. Household spending was also strong in the quarter, rising 0.6 percent and contributing to half of the economy's growth. Machinery and equipment fell 6.9 percent, subtracting 0.4 percentage point from GDP growth. Changes in inventories reduced growth by 0.4 percentage point.

Easing Expectations

The weaker than expected data raises hopes that the central bank will do more to stimulate the economy going forwards. In May, the bank cut rates by 25 basis points unexpectedly. The continued weak data could open the way for further rate cuts.

Swaps markets are currently pricing in a 40 percent chance of a further 25 basis point cut at the next meeting. The recent uptick in these expectations has weighed on the Australian dollar, which has fallen nearly 2.25 percent against the U.S. dollar over the past two trading sessions. The drop in the Aussie dollar began yesterday when the RBA left the door open to further easing and the market has reacted to these comments.