Posted on 02 Sep 2010
Australia’s economy grew at the fastest pace in three years last quarter as households spent far more than expected while exports enjoyed an Asian-driven boom, reviving the risk of a further rise in interest rates.
The Australian dollar jumped after government data showed gross domestic product (GDP) climbed 1.2% in the second quarter compared with the first when it rose 0.7%.
That handily beat forecasts of a 0.9% increase and took growth for the year to 3.3%, marking Australia’s 19th consecutive year without a recession.
“It’s a fantastic result – the economy is as strong as an ox,” said Brian Redican, a senior economist at Macquarie. “It was also well balanced with household consumption much stronger than anyone thought. From here, business investment should pick up the baton and drive growth for the next 12 months.”
“It’s a picture of good health which validates what the Reserve Bank has done up to now and certainly rules out any chance of a rate cut,” he added.
The Reserve Bank of Australia (RBA) led the developed world by lifting interest rates 150 basis points between October and May. It has been on hold at 4.5% since as inflation moderated, and investors were even toying with the idea of a cut in rates given a slowdown in the United States and Japan.
Wednesday’s upbeat data forced a major reappraisal, with interbank futures tumbling as the market sharply scaled back the chance of a cut.
“Australia is continuing to outperform major developed nations in terms of growth,” said SuLin Ong, a senior economist at RBC Capital Markets.
“There is a lot of global uncertainty and that could keep the RBA sidelined into 2011, but for an economy that is going through an enormous terms of trade shock, it still argues for higher rates.”
Australia’s good fortune owes much to the industrialisation of two billion people in China and India which is generating voracious demand for Australia’s resource riches, from coal to copper to wheat.
That demand has driven huge price increases for Australia’s two biggest exports, iron ore and coal, resulting in record profits for miners and massive investment plans for years ahead.
This is why the RBA continues to tout a golden era of prosperity for the country, despite uncertainty abroad.
Growth in the second quarter was driven by household consumption, which added 0.9 percentage points to GDP in a major surprise given lacklustre retail sales. Consumer spending on vehicles alone jumped a hefty 11.2%.
