Australia’s Economy Builds on Winning Streak

Australia’s economy shrugged off the effects of a cyclone in March to grow strongly in the second quarter, helped by soaring business confidence and higher commodity prices.

Gross domestic product grew by 0.8% in the second quarter from the first quarter and 1.8% from a year earlier, data showed Wednesday.

That was close to economists’ forecasts of 0.9% growth over the quarter and 1.9% growth over the year. And it was a strong result compared with first-quarter growth, which was left unchanged at 0.3% on-quarter.

Australia has now completed 26 years of growth since the last recession in the early 1990s.

The upbeat data reflect rising business confidence in Australia, which has played out in much stronger employment growth and rising non-mining investment.

Treasurer Scott Morrison said the economic momentum improved the prospect of a smaller deficit compared with forecasts in May’s budget.

“I anticipate that based on these figures today and other data that has come that we will achieve a better-than-the-budgeted outcome,” he told reporters.

It also supports the optimistic outlook offered by the Reserve Bank of Australia this week, even though it kept official interest rates unchanged at a record-low 1.5% for a 13th month in a row.

In a speech Tuesday in Brisbane, RBA Gov. Philip Lowe said he has been encouraged by recent strength in investment and full-time jobs growth, something the RBA has been anticipating for some time.

The solid second-quarter GDP result was supported by strength in exports and public spending, led by infrastructure construction.

Alan Oster, chief economist at NAB, said the strength of growth firms up the probability that the next move in Australian interest rates will be higher.

“This fits with the RBA’s upbeat view on the economic outlook, is consistent with the next move in rates being up rather than down, and raises the risk that the RBA may hike sooner than we currently expect in 2019,” Mr. Oster added.

Iron-ore prices, still an important factor in economic growth, have been higher than expected over recent months, fanning confidence and generating added income for resource companies.

Higher consumer spending helped growth in the quarter, but lingering pessimism among consumers continues to cloud an otherwise sunny outlook for the economy. Record household debt combined with slow wages growth are keeping Australians’ cash in their wallets.

Households savings continued to fall in the quarter, reaching a new low since the global financial crisis in 2008, while income indicators remained flat across the board.

A further complication is coming from the Australian dollar, which has risen to its highest level in over two years in recent months. That could weigh on exports, economic growth and inflation.

The headwinds confronting the Australian economy are significant enough to keep interest rates low for some time.
Source: Dow Jones

Source