Australia Expanded at Slower Pace in Second Quarter

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By Michael Heath

Pedestrians walk through a laneway lined with boutiques and street cafes in central Melbourne, Australia. Compared with a year earlier, the country’s economy expanded 3.1 percent in the second quarter, a Bureau of Statistics report released in Sydney today showed. Close

Pedestrians walk through a laneway lined with boutiques and street cafes in central…

Pedestrians walk through a laneway lined with boutiques and street cafes in central Melbourne, Australia. Compared with a year earlier, the country’s economy expanded 3.1 percent in the second quarter, a Bureau of Statistics report released in Sydney today showed.

Australia’s economic growth slowed last quarter as the currency strengthened and commodity prices weakened, underscoring the central bank’s bias to keep interest rates at a record low to boost domestic demand.

Second-quarter gross domestic product advanced 0.5 percent from the previous three months, when it rose 1.1 percent, a Bureau of Statistics report released in Sydney today showed. The result compared with a median forecast for a 0.4 percent gain from a survey of 27 economists by Bloomberg News.

The data underscore a division in policy outlook between the Federal Reserve, which markets bet will tighten next year, and the Reserve Bank of Australia’s flagged period of stability for its record-low benchmark. Australia is losing its developed-world-beating status as the mining investment boom that powered it through the global financial crisis wanes, while the associated currency strength fails to dissipate.

“If you abstract from all the big moves in net exports and inventories over the last couple of quarters we still have the same old dilemma for the economy: what’s growing outside mining?,” said Stephen Walters, JPMorgan Chase & Co.’s Sydney-based chief economist in Australia. “Good question, not much.”

Glenn Stevens, governor of the Reserve Bank of Australia, lowered borrowing costs to spur property prices and encourage housing construction to help soak up some of the unemployment from the end of the mining investment bonanza. Close

Glenn Stevens, governor of the Reserve Bank of Australia, lowered borrowing costs to…

Glenn Stevens, governor of the Reserve Bank of Australia, lowered borrowing costs to spur property prices and encourage housing construction to help soak up some of the unemployment from the end of the mining investment bonanza.

The Australian dollar fell after the report, trading at 92.79 U.S. cents at 12:12 p.m. in Sydney, from 92.83 cents before the release.

Household Spending

The economy expanded 3.1 percent in the second quarter from a year earlier, today’s report showed. The median forecast of economists was for a 3 percent rise.

Australia hasn’t recorded two consecutive quarters of economic contraction, the technical requirement for recession, in 23 years. It avoided the Asian financial crisis of 1997-1998 and the 2009 global recession as government stimulus and a mining investment boom to meet Chinese demand powered growth.

The nation’s currency averaged 99 U.S. cents in the past three years, compared with just over 70 cents in the prior two decades, spurred by the resource-investment boom and near-zero interest rates in the U.S. and Japan. That strength — even as prices of iron ore, Australia’s biggest export, have fallen 35 percent this year — has hurt manufacturing.

The Aussie “remains above most estimates of its fundamental value, particularly given the declines in key commodity prices,” RBA Governor Glenn Stevens said yesterday in a statement announcing the central bank board’s decision to leave rates unchanged at 2.5 percent for a 13th month. “It is offering less assistance than would normally be expected in achieving balanced growth in the economy.”

Commodity Prices

The nation’s terms of trade declined 4.1 percent in the second quarter from three months earlier and 7.9 percent from the same period a year earlier.

“The data reflects the fall in commodity prices combined with the still very high level of the Aussie dollar,” Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney and a former RBA economist, said before the report. “The Aussie dollar is slowing the pace of rebalancing in the economy and constraining income growth.”

Australia’s jobless rate jumped to a 12-year high of 6.4 percent in July and company profits dropped 6.9 percent in the second quarter from the previous three months, the largest fall in five years.

Caltex Australia Ltd. (CTX), Australia’s biggest oil refiner, said last month it plans to cut about 350 jobs, which follow previously announced reductions of more than 330 staff related to closing the Kurnell refinery.

Borrowing Costs

Stevens lowered borrowing costs to spur property prices and encourage housing construction to help soak up some of the unemployment from the end of the mining investment bonanza. The move has paid dividends: with house prices surging and residential building growing.

Central bank data released last week showed home loans to investors in the 12 months ended July surged 8.9 percent, the fastest pace since May 2008. Home prices across Australia’s state and territory capitals recorded the biggest winter gain since 2007, according to the RP Data-Rismark Home Value Index released two days ago. Prices advanced 4.2 percent in the three months through August, it showed.

Household spending rose 0.5 percent in the second quarter from three months earlier, adding 0.3 percentage point to GDP growth, today’s report showed. Dwelling construction advanced 2.3 percent, adding 0.1 percent, while machinery and equipment dropped 3.4 percent, subtracting 0.2 percentage point.

The nation’s household savings ratio climbed to 9.4 percent in the second quarter from a revised 9.2 percent in the first three months of the year, today’s report showed.

Stevens said in yesterday’s statement: “looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time.”

To contact the reporter on this story: Michael Heath in Sydney at [email protected]

To contact the editors responsible for this story: Stephanie Phang at [email protected] Iain McDonald, Edward Johnson

 

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