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Australia economy marks 22 years of growth in Q2

The Central Business District is seen from the air on a sunny winter afternoon in Sydney August 24, 2013. REUTERS/Daniel Munoz
The Central Business District is seen from the air on a sunny winter afternoon in Sydney August 24, 2013. REUTERS/Daniel Munoz

By Wayne Cole

SYDNEY (Reuters) - Australia's economy grew moderately last quarter as modest gains in consumer and government spending offset a very flat performance elsewhere, though there was still scant sign of a much-needed recovery in business investment.

The Australian Bureau of Statistics reported gross domestic product (GDP) rose 0.6 percent in the second quarter, from the previous quarter when it rose 0.5 percent. That was enough to send the local dollar higher as there had been fears the report would be much weaker.

The result marked 22 years since the country last suffered a recession, but still underwhelmed. Crucially, there are few signs as yet that business and consumer spending is ready to take over from mining investment as a growth engine.

"Overall it tells us that the economy is continuing to grow but at a very subdued rate, and it's not strong enough to push employment or inflation up," said Shane Oliver, chief economist at AMP Capital Investors.

"We're still far from the collapse that many had feared, but we're still looking for a replacement for mining investment as a driver for growth."

The Reserve Bank of Australia (RBA) has been doing its part by cutting cut interest rates to a record low of 2.5 percent last month. Many analysts think it will likely have to ease again in coming months.

Financial markets, on the other hand, have pared back expectations for any more easing, in part because of brighter signs in the global economy and especially China.

The Asian giant takes fully a third of Australia's exports and influences the price for many of its commodities, so a stabilization of demand there is a promising omen.

It has been enough for investors to question whether the RBA is done with its easing cycle, a run that began back in November 2011 when rates were up at 4.75 percent.

Interbank futures show a 50 percent chance of a rate cut by Christmas, down from more than 100 percent a couple of weeks ago. Swap markets have priced out any easing at all, though much depends on how the Australian dollar fares.

The central bank keenly wants the currency to fall further to help cushion the economy, both by boosting export earnings and by easing competitive pressures on domestic industry.

Many analysts suspect that should the dollar hold above 90 U.S. cents as it was on Wednesday, the RBA will choose to offset it by cutting again.

NOT NORMAL

Wednesday's data showed the value of all goods and services produced in Australia was 2.6 percent higher than in the second quarter of 2012. That was short of the 3.25-3.5 percent pace that economists consider "normal", though the world's 12th-largest economy did at least outpace its peers.

Comparable growth United States was 1.6 percent, 1.4 percent for Canada and 0.7 percent in Germany. Despite all the talk of recovery in the European Union, its economy shrank by 0.7 percent over the year.

Output for the 12 months to June was worth A$1.51 trillion in current dollars, or about A$65,163 ($59,233) for each of Australia's 23 million people. That compares with per capita GDP in the United States of $52,712.

However, growth was very narrowly based with only small contributions from consumer and government spending, as well as inventories. Pretty much every other sector was flat in the quarter.

Especially disappointing was that home construction added nothing at all to growth. While home building only accounts for 5 percent of the economy it does have huge spillover effects into employment and consumption and a typical recovery can add a percentage point or more to growth over a couple of years, something the RBA was keen to see taking the place of mining investment.

Consumer spending grew just 0.4 percent in the quarter, less than half of the pace seen last decade, while the personal savings rate stayed at a high 10.8 percent.

Fortunately for the prospects of future rate cuts, there was scant sign of inflation in the report, with unit labor costs falling for the year in a very rare event.

(Reporting by Wayne Cole; Editing by Eric Meijer)

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