China's demand stokes fast growth rate

Australia's economy grew at the fastest pace in three years last quarter, stoked by China's demand for iron ore, boosting the currency on speculation interest rate increases will resume early next year.

Gross domestic product advanced 1.2 per cent from the first quarter, when it rose a revised 0.7 per cent, the Bureau of Statistics said. That beat the median estimate in a Bloomberg survey of 23 economists for a 0.9 per cent gain.

China's demand for iron ore and coal is prompting companies such as BHP Billiton to expand production and mines, stoking an economy that was one of the few to skirt last year's global recession.

The faster-than-expected growth may not prompt the central bank to resume the most aggressive round of rate increases by a Group of 20 member until early 2011, partly because of signs that the global recovery may be slowing.

"Australia is continuing to outperform world growth standards," said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney. "Private consumption was firmer, plus export prices have supported growth.

"There is nothing to suggest a rate cut is on the cards," she said. "The next move in rates will be upward and that will be in early 2011."

The Australian dollar rose to US89.69c at 12.13pm in Sydney from US89.49c just before the report was released. The two-year government bond yield advanced 3 basis points to 4.31 per cent.

Exports advanced 5.6 per cent in the quarter, adding 1.1 percentage points to GDP, the report showed. Household spending increased 1.6 per cent, contributing 0.9 percentage point to GDP.

The report underscores Reserve Bank of Australia Governor Glenn Stevens' view that the nation's economy is expanding close to trend as income from exports surges, a key justification for raising borrowing costs six times between October and May.

Another report yesterday showed that manufacturing in China, Australia's largest trade partner, grew at a faster pace in August after the weakest gain since February 2009 in the previous month, indicating that the economy's slowdown would be limited.

The Purchasing Managers' Index rose to 51.7 from 51.2, exceeding the median forecast in a Bloomberg News survey, the Federation of Logistics and Purchasing survey showed.

Australia's economy grew 3.3 per cent from a year earlier, the report showed. Economists forecast a 2.8 per cent expansion.

By contrast, GDP in the US rose 3 per cent in the second quarter and Japan's increased 2 per cent. When asked whether the US economy faced a double-dip recession, RBA Assistant Governor Guy Debelle said that "it's a risk". Policymakers expect Australia's annual growth to accelerate to 4 per cent by the end of 2012, boosted by projects such as Chevron's A$43 billion ($55 billion) Gorgon natural gas venture in Western Australia, potentially stoking inflation pressures.

"Inflation can be a problem during resources booms ... we need to remain alert to the risks," central bank Deputy Governor Ric Battellino said in August.

- BLOOMBERG