Base Indicator: Australia Q3 GDP

Impact: High

Currencies: AUD/USD

Actual: 0.3, Consensus: 0.7, Previous: 0.5

Australian GDP sank to 0.3 percent in the third quarter, significantly below analysts’ expectation of 0.7 percent, Australian Bureau of Statistics showed on Tuesday. In the second quarter, GDP grew by 0.5 percent.

Although Australia has been growing at around trend, yet economists are concerned that whether the economy will be able to cope with the shocks coming from global commodity markets.

Australia being a major commodity exporter, the recent fall in commodity prices has led to massive declines in company profits, investment, wages and tax receipts. Capital expenditure was especially weak in the third quarter, ripping 0.6 percentage points from GDP.

“This will encourage the market to fully price in another cut in interest rates, though it's not clear whether 25 basis points would really make that much difference. Market lending rates are already very low and there's no lack of financing", said Michael Workman, Senior Economist, CBA.

In the fourth quarter, the RBA expects the annual growth to ease to 2.5 percent and will probably be around 2.5% to 2.75%.

The RBA has kept interest rates unchanged at 2.5 percent for the past 16 months, but has remained cautious on slashing the rates further over fears of inflated housing bubble. However, experts are now narrowing the odds on an easing by the central bank due to weaker GDP figures in the third quarter.

"That big miss [actual GDP falling below expectation] is causing some market participants to reassess whether the RBA is going to actually cut rates next year”, said Craig James, Chief Economist at CommSec.

Australian Treasurer Joe Hockey remained optimistic despite the recent weak data and said the GDP was only fractionally lower than expected.

"While the September figures are weaker than market expectation, 0.3 percent is only marginally lower than what we were expecting," Hockey said. "I have no doubt 2015 will be better and beyond will be better than that," he added.

The Australian dollar reacted on the news and dropped to a four-year low of 83.92 U.S. cents, down from 84.62 U.S. cents just before the data was published.

“The target at 0.8400 was met earlier this morning with a sharp drop to a low of 0.8392. The outlook is still clearly bearish and we are expecting further AUD weakness towards 0.8340. The trailing-stop has moved lower to 0.8550 from 0.8620 previously”, said the UOB Group Research Team on Wednesday.

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