Although the majority of economists were predicting that Australian real GDP growth would be lower in the September quarter, few expected it to be as bad as it was.
At -0.5% real GDP growth made its sharpest quarterly decline since the Global Financial Crisis in 2008. The largest contributor to the fall was a 3.6% drop in the output of the construction industry due to reduced building activity.
Although the data was shocking, I don't believe it is time to panic about Australia being on the brink of a recession. The fourth quarter has enjoyed a reasonably solid start with retail sales increasing and commodity prices surging.
I believe this supports the view of Australian GDP returning to a least a low level of growth in the December quarter.
Not that this looks likely to stimulate much by way of inflation. Australian inflation currently stands at 1.3%, some distance from the inflation rate target of 2% to 3%.
Unfortunately I've not seen anything from this release or recent economic data that would indicate an uptick in inflation coming.
So if the Reserve Bank wants to hit its inflation target in 2017, I believe another cut to interest rates may be required in February.
It appears as though I'm not alone in this view. Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), and Westpac Banking Corp (ASX: WBC) are all notably higher today, with investors appearing to believe further monetary easing will be a positive for the ASX and the banks in general.
Interestingly three of the big 4 banks have lifted their own interest rates independently of the Reserve Bank in the last few days in order to offset pressures on profits.
If the RBA cuts further and the banks don't pass these cuts on to borrowers, they could see a significant lift in their net interest margins. In light of this I'm not surprised to see them rally today, especially as this could support their market-beating dividends.
