Australia's economy grew at the slowest pace in almost two years last quarter as the booming mining sector hit an air pocket while consumers were cowed by higher interest rates, sending the local dollar skidding. Wednesday's data showed gross domestic product (GDP) rose just 0.2 percent in the third quarter, compared to the second when it jumped 1.1 percent.
That was short of already modest forecasts of 0.5 percent and only a bumper performance from the country's farms avoided a negative outcome. Growth for the year to September was also lower than expected at 2.7 percent, after downward revisions to the past, making it harder to meet the Reserve Bank of Australia's (RBA) forecast of 3.5 percent for all of 2010.
"A disappointing outcome both with the quarter and the downward revisions," said Michael Blythe, chief economist at Commonwealth Bank. "We're still churning out what's a decent rate of growth but it's not as solid as it had looked." Investors expressed their disappointment by knocking the Australian dollar down half a cent to $0.9550. "It probably confirms the RBA is on hold for a while, it suggests there's no urgency to act," added Blythe.
Investors had already priced out almost any chance of a rise in rates for the next few months, following November's hike to 4.75 percent. The RBA has made it clear any further tightening would be gradual, following seven hikes in 13 months, with the next increase perhaps not until the middle of 2011.
That was a more leisurely pace than most analysts had looked for, and left the market pricing in just 20 basis points of tightening for the next 12 months. For the 12 months to September, GDP was put at A$1.3 trillion, or A$57,860 for every man, woman and child. That was handily ahead of US per capita GDP at around $42,000. Some of the drags on growth looked to be temporary. A fall in export volumes was mainly caused by weather-related delays to iron ore and coal shipments which should be made up this quarter. An unexpected run-down in inventories was also likely to be reversed this quarter, adding to growth.
Business investment disappointed in the third quarter but again analysts suspect some spending that was planned was delayed and will appear in future quarters. Indeed, a survey of planned investment shows A$129 billion worth of spending due in 2010/11 alone, worth 10 percent of GDP.
Analysts are also counting on voracious demand for Australia's resource exports from China and India to last for years. India's GDP numbers surprised with their strength this week, while Chinese manufacturing figures beat forecasts. That demand has driven huge prices increases for Australia's major commodity exports, lifting its terms of trade 24 percent in the year to September, the highest in a century.
The windfall is clearly showing up in profits, wages and, crucially, employment. A blistering 106,000 jobs were created in the quarter, while wages grew 7.3 percent, helping lift the household savings ratio to 10.2 percent. It also shows clearly in nominal GDP which rose 1.2 percent in the third quarter, to be up a heady 9.6 percent for the year, growth usually only seen in developing nations.
Just this week, RBA Governor Glenn Stevens estimated the boost from the terms of trade was worth 12 to 15 percent of GDP for every year that it stayed near historic highs. That is the major reason the central bank sees a golden age of prosperity ahead for Australia and why it believes rates will probably have to rise further, albeit gradually. "We think today's number is a blip and that the leading indicators in terms of trade, investment capex suggest growth will be stronger into the new year," said Kate King, a senior economist at St George Bank.