Australia accelerating out of gloom

Photo / Mark Mitchell

Australia's economic growth unexpectedly accelerated in the second quarter.

Treasurer Wayne Swan said Australia's economy had grown faster than that of any other advanced country in the past year.

"This is a remarkable result given how fragile the global economy is," Swan said.

Gross domestic product rose 0.6 per cent from the previous three months, when it grew 0.4 per cent, the Bureau of Statistics said in Sydney yesterday.

The median estimate of 20 economists surveyed by Bloomberg was for a 0.2 per cent expansion.

Australia's economy has been "stronger than expected" amid resilient consumer spending, exports and business investment, central bank Governor Glenn Stevens said on Tuesday after keeping the benchmark interest rate at 3 per cent for a fifth month.

GDP may expand further in coming quarters as the Government spends A$22 billion ($27 billion) on roads, railways and schools.

"Australia's economy continues to defy the global recession, proving to be more resilient than anticipated," Bill Evans, chief economist at Westpac Banking in Sydney, said.

Consumer spending advanced 0.8 per cent in the quarter, adding 0.5 percentage points to GDP, yesterday's report said.

Exports increased 1 per cent, adding 0.2 percentage points to GDP.

The economy grew 0.6 per cent from a year earlier, the report showed. Economists forecast a 0.3 per cent expansion.

By contrast, Japan's economy grew at an annual 3.7 per cent pace in the second quarter, following an 11.7 per cent contraction the previous three months, the UK's GDP dropped 5.5 per cent, the most since records began in 1955, and the US shrank 1 per cent.

Measures of Australian confidence have recovered, and increased construction work and "public demand will also start to provide more support to spending soon and, hence, growth is likely to firm going into 2010," Governor Stevens said.

The Reserve Bank scrapped its forecast last month for the economy to contract this year, instead predicting gross domestic product will expand 0.5 per cent. The bank expects growth will accelerate to 2.25 per cent in 2010 and 3.75 per cent in 2011.

Reports this week showed building approvals rose for a second month in July and manufacturing expanded in August for the first time in 14 months.

Consumer and business confidence have also surged to the highest levels in almost two years after the Government distributed more than A$20 billion in cash to households since the collapse of Lehman Brothers Holdings almost a year ago.

Woolworths, Australia's largest retailer, said last week that profit in the six months ended June 28 jumped 16 per cent as demand grew at the company's supermarkets and Big W discount stores.

Still, there are signs the impact from the Government's cash handouts may be waning. Retail sales fell in June, business profits dropped in the second quarter by the most since 2003, company inventories tumbled by a record 3.4 per cent from the previous three months and lending by banks and other finance companies to businesses fell in July for a sixth month.

While the central bank's record 4.25 percentage points of interest-rate cuts between September and April prompted consumers and businesses to bring forward spending plans, "in those areas demand may soften in the near term," Stevens said yesterday.

"Some types of capital spending are also likely to be held back for a while by financing constraints," he added.

Qantas Airways, the nation's biggest airline, said this month it would embark on a A$1.5 billion cost-cutting programme after falling demand for travel led to its first loss in six years.

Traders forecast the central bank's overnight cash rate target will be 161 basis points higher in 12 months, says a Credit Suisse Group AG index based on interest-rate swaps yesterday.

While inflation should continue "to moderate in the near term", the likelihood that annual consumer price gains will stay below the bank's target range of between 2 per cent and 3 per cent "looks low," Stevens said on Tuesday.

The chain price index, a measure of retail prices, declined 2.2 per cent in the second quarter from the previous three months.

- BLOOMBERG