Australian economic expands at fastest rate in four years

Australia’s resource-rich economy expanded at its fastest annual pace in four years last quarter, clinching a remarkable run of 25 years without recession as surging exports more than made up for a patchy performance at home.

The Australian dollar held firm at $0.7662 after news that gross domestic product (GDP) had risen 3.3 per cent in the year to June, up from about 2.9 per cent in the previous quarter.

The value of all goods and services rose 0.5 per cent compared with the first quarter, when output climbed by an unusually strong 1 per cent. Growth in the quarter was bolstered by a pre-election spurt in government spending combined with modest gains in household spending and home building.

That helped to offset another steep decline in mining investment, which has been dragging on the economy for more than three years. For the year as a whole, international trade was the biggest prop to growth as the hundreds of billions spent on mining projects yielded a bounty of resource exports.

Trade accounted for no less than 2.2 percentage points of growth in the year to June. That strength in exports belied a much more mixed picture at home, where domestic final demand grew by just 1.2 per cent in the year and household consumption grew by 1.6 per cent.

The report also suggested the economy was not yet running hot enough to revive inflation, with the main GDP price indicator up only 0.3 per cent for the year.

Low inflation

"If we didn't have a low-inflation problem in Australia then these figures would argue against a rate cut," said Shane Oliver, chief economist at AMP Capital Investors.

“Inflation has been too low for too long and that could argue for the next rate cut in November,” he added. “But I have to say it’s a close call.”

The need for even “stronger growth” was cited by the Reserve Bank of Australia when it cut interest rates to record lows of 1.5 per cent in August, and why it might yet ease again.

Financial markets now imply about a 44 per cent chance of a further rate cut by Christmas.

Overall, the Australian Bureau of Statistics estimated annual GDP was worth A$1.65 trillion (€1.13 trillion) in current dollars, or about A$68,929 (€47,133) for each of the country’s 24 million residents.

Annual growth was handily ahead of 1.2 per cent in the United States, 1.6 per cent in the European Union, 2.2 per cent in the UK and even outpaced Germany's 3.1 per cent.

There was also a welcome pick-up in the country’s terms of trade as prices for its major commodity exports bounced following a couple of years of steady decline. That in turn helped lift national income, while nominal, or current-price, GDP climbed 1.3 per cent in the quarter for its best performance since late 2013.

Income drag

"It appears that the income drag from falling commodity prices is over," said Michael Blythe, chief economist at CBA.

“Some simple calculations show that just a levelling out in commodity prices would see income growth pick up from 2 per cent a year to 4-5 per cent over the next couple of years.”

Such a turnaround would be warmly welcomed by the coalition government of Malcolm Turnbull since it is nominal GDP that drives the tax take and an increase in revenue is desperately needed to rein in runaway budget deficits. – (Reuters)