ANALYSTS: Australia Inventory Drop Poses Downside Q2 GDP Risk

     SYDNEY (MNI) - Australia's private non-farm inventories fell unexpectedly

in the second quarter, raising the risk that Q2 GDP will come in weaker than

expected and that the year-on-year growth rate will remain stuck around 1.7% --

the lowest since Q2 2009 -- for the second quarter in a row.  

     Data published by the Australian Bureau of Statistics earlier Monday showed

business inventories fell by 0.4% in Q2 due mainly to a large 2.4% q/q drop in

wholesale trade inventories, which fell for the first time in six quarters. The

decline compared with MNI survey median forecast for a 0.3% q/q rise. 

     Economists estimated the inventory drop could subtract 0.6 percent point

from Q2 GDP.

     MNI's median forecast for GDP prior to the data release, based on survey of

17 economists, stood at +0.8% q/q and +1.8% y/y.  The Australian Bureau of

Statistics is due to release the GDP data at 11:30 am local/0130 GMT on

Wednesday. 

     Many economists maintained their forecasts but conceded that there was a

risk the results would be lower than they expected. 

     National Australia Bank economists maintained their GDP forecast of +0.6%

q/q and +1.6% following the inventories data while highlighting the downside

risk.

     "We'll be sticking with the 0.6% for now, even though the somewhat

mechanical risk from inventories tilts the measured growth risk to the downside

ahead of net exports and government spending tomorrow," NAB economists wrote in

a note.

     Economists at ANZ also said that there is now downside risk to their

current Q2 GDP forecast of +0.5% q/q and +1.5% y/y.

     UBS economists slashed their GDP forecast to +0.7% q/q from +0.9%, with the

y/y rate revised down to +1.7% from +1.9%. "There is still downside risk but the

outcome is more uncertain than normal given the large gap between construction

and capex, and the implications for net exports which we expect to show a modest

contribution," UBS wrote in a note.

     Westpac economists maintained their +0.7% q/q forecast. But with

inventories making an even larger-than-expected subtraction from growth than

their earlier expectation, they suggested the risk to their forecast was tilted

to the downside.

     Macquarie economists say the data so far are in line with their

expectation, so their +0.7% q/q forecast remains intact. 

     The Balance of Payment and government spending data will be released

Tuesday before the GDP data is released on Wednesday. The Balance of Payment

data include the net export contribution to GDP and, together with release of

government spending numbers, economists will make their final GDP forecast later

Tuesday.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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