Tuesday 27 September 2016

Australia economy speeds to 3pc as consumers outrun commodities gloom

Thousands of Irish made Australia their home following the economic crash but there are still concerns about the commodities market

Published 02/03/2016 | 09:05

SYDNEY, AUSTRALIA - JANUARY 01: The fireworks at Mrs Macquaries chair on New Year's Eve on January 1, 2016 in Sydney, Australia. (Photo by Tony Feder/Getty Images)
SYDNEY, AUSTRALIA - JANUARY 01: The fireworks at Mrs Macquaries chair on New Year's Eve on January 1, 2016 in Sydney, Australia. (Photo by Tony Feder/Getty Images)

Australia's economy outpaced all forecasts to grow at the fastest pace in almost two years last quarter, a hopeful sign the worst of the global commodity rout may be over for the resource-rich nation.

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Wednesday's upbeat report sent the local dollar leaping half a U.S. cent as investors reined back expectations of further cuts in interest rates, while providing a political boost to the coalition government of Malcolm Turnbull.

Turnbull faces a national election later this year and an improving economic background could argue for him to go a few months early, perhaps in July.

Gross domestic product (GDP) grew 0.6 percent in the fourth quarter, from the previous quarter when it rose an upwardly revised 1.1 percent.

That propelled growth for the year to 3 percent, well above the 2.5 percent that had been expected by both analysts and the Reserve Bank of Australia (RBA).

"Given Australia is going through the biggest mining pullback in our lifetimes, this is a pretty good outcome," said David de Garis, a senior economist at National Australia Bank.

"Our baseline is that the RBA is done cutting rates, and these numbers only support that view."

The central bank has held rates steady since May last year and just this week skipped a chance to ease, saying it saw "reasonable prospects" for growth.

Investors are still wagering it will have to ease eventually given the headwinds facing the global economy, but likely not as quickly. Interbank futures <0#YIB:> now imply a 45 percent chance of a cut by May, compared to 60 percent before the data.

The RBA would prefer that any further stimulus come through a lower Australian dollar, but is being thwarted by the drastic easing of central banks elsewhere.

The Bank of Japan only recently joined the club of negative interest rates and the European Central Bank is widely expected to cut further below zero next week.

The slowdown in China also remains a major uncertainty since the Asian giant takes almost a third of Australia's exports.

ON THE MEND

Yet the RBA estimates the worst of the drag from mining will be over this year, while record low rates, rising house prices and a boom in home building continue to juice domestic demand.

Household consumption is clearly on the mend adding just over half of the economic growth seen over 2015, while home construction added another half a percentage point.

Overall, the Australian Bureau of Statistics reported the value of goods and services produced was worth A$1.63 trillion ($1.18 trillion) in current dollars, or around A$68,400 for each of its 24 million residents.

Annual growth of 3 percent handily topped the 2.1 percent boasted by Germany in 2015, as well as the 1.9 percent enjoyed by the United States and UK, and Canada's 1.2 percent.

Importantly, the acceleration in growth made the strength of employment in recent months seems less of an outlier.

"There was a fair deal of debate about how accurate the job numbers were -- but it looks like they were telling the right story after all," said Michael Blythe, chief economist at Commonwealth Bank of Australia.

"If that's the case, that's a pretty powerful signal for the RBA to stay on hold."

Reuters

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