Market calls: No hard China landing

Growth concerns have gripped China after the release of soft third quarter Chinese gross domestic product data last week. The data showed China’s GDP growth slowed to 7.3 per cent year-on-year in the third quarter, the slowest rate in five years.

"While US activity remains strong, weakening growth in China has implications for commodities and poses some downside risk to the Australian growth outlook."
ANZ Research

ANZ Research expects that to rebound to 7.5 per cent in the fourth quarter, but says large-scale policy easing appears unlikely.

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While US activity remains strong, weakening growth in China has implications for commodities and poses some downside risk to the Australian growth outlook. 

These Chinese concerns combined with strongly rising iron ore supply has seen bulk commodity prices, particularly iron ore, weaken. Lower commodity prices will weigh on Australian income growth and pose some downside risk to the outlook. 

Elsewhere, labour market conditions in Australia remain soft but there are some modest positive signs. Data has shown that while labour was a slightly lower constraint on output in the third quarter, it remains harder to get overall than at the turn of the year. Job advertising trends suggest labour demand is gradually improving, particularly in the non-mining states. 

Domestically, and looking through the effect of the carbon tax repeal, third quarter CPI figures last week suggested subdued inflation pressures. 

Price rises for tradable items were surprisingly weak, with retail conditions appearing to suppress pass-through from the weaker currency. Market-based non-tradables inflation continued to ease. 

In better news, this soft inflation suggests little urgency for higher rates. The weaker Australian dollar, if it persists, should drive headline inflation into the top half of the Reserve Bank of Australia’s 2 per cent to 3 per cent target band next year. However, the still-tame inflation outlook suggests the RBA remains firmly on hold. 

ANZ Research expects the RBA to raise the cash rate from May 2015 but acknowledges the risks are currently tilted towards a slightly later start. 

The Australian dollar is consolidating its losses near its 2014 low after a period away from fair value, but that does not necessarily mean that it is likely to rise. 

Looking ahead, we expect the currency to continue to move in line with its fundamentals and our assessment is that the risks remain to the downside. This means further declines are likely but the moves may occur more gradually than in recent weeks.