Australian GDP surprisingly strong in Q4

Australian GDP surprisingly strong in Q4
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By Reuters March 7 01:47:53 GMT


Australia’s economy grew at its fastest pace in one and a half years last quarter as consumers and the government spent briskly while businesses ramped up production to meet strong domestic demand.

The strength handily beat market expectations and pushed the Australian dollar higher while bonds slipped as investors gave up any thought of interest rates being cut later in the year.

“It is clearly higher than most people were expecting, suggesting the economy had a fair amount of momentum in it at the end of 2006 and not a bad base for 2007,” said Michael Blythe, chief economist at Commonwealth Bank.

The country’s gross domestic product (GDP) rose 1.0 percent in the fourth quarter to an inflation-adjusted A$236 billion ($183 billion). That was well above forecasts of a 0.6 percent increase. Annual growth quickened to 2.8 percent from 2.2 percent in the third quarter.

Household spending added 0.7 percentage point to growth, as did business and government investment. Companies stocked up on n inventories, contributing a similar amount to growth. All of that helped to offset a hefty 1.3 percentage point drag from the country’s trade deficit.

Analysts noted output was up across a range of industries, outweighing weakness in the drought-hit farm sector, while incomes were further boosted because Australia’s export prices have been rising and its import prices falling.

“The Australian economy is responding to the most favourable global conditions in decades,” said Warren Hogan, head of market economics at Westpac. “The economy enters 2007 with momentum and will shrug off the impact of last year’s rate rises.” The Reserve Bank of Australia (RBA) raised rates three times in 2006 to curb inflation, with some success.

NEAR THE SPEED LIMIT

Earlier on Wednesday, the central bank left rates unchanged at 6.25 percent, a decision widely expected given growing confidence among officials that past tightenings were working to restrain inflation.

“Our base case favours a period of steady cash rates for the RBA, possibly throughout the whole of 2007,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“However, we continue to think that the extremely tight labour market, high level of capacity utilisation, risk of fiscal stimulus, and a generally supportive global growth backdrop will keep a tightening bias intact for some time,” she added.

That was essentially the message from a top central banker on Wednesday.

In a speech to an industry conference, Malcolm Edey, head of the RBA’s economics department, was optimistic on the outlook for global growth, thanks in large part to booms in China and India which he thought could continue for decades yet.

In turn, such growth would keep the demand for resources high and support the economies of commodity producers such as Australia, which was already close to full capacity after 16 years of uninterrupted expansion, said Edey.

Crucially, the labour market remains drum-tight with unemployment at 30-year lows of 4.5 percent after employers created a stunning 300,000 new jobs in the past year.

“The RBA’s main concern is the economy is running out of new workers,” said Rory Robertson, interest rate strategist at Macquarie Bank.

“It will only tighten again if unemployment falls yet further or we get some really bad news on inflation. Otherwise, they must be thrilled with where the economy is right now,” he added.