Australian GDP grew 0.6% in June quarter

Australian GDP grew 0.6 percent in the June quarter from March as the Australian economy continued to batter away the global recession. The growth indicated an annualized rate of 2.4 percent, up from the 1.5 percent growth in the March quarter. This is the fastest pace of quarterly growth since the start of 2008.

The result was above a median estimate of 0.2 percent quarterly growth in a Bloomberg survey of 20 economists, but below a 0.7 percent estimate from an AAP survey.

Vindicated economic stimulus

It appears that the global meltdown slowed Australia's economy only momentarily, with strong consumer demand, solid growth in China, hefty policy stimulus and resilient business investment supporting demand.

Consumers benefited from cash handouts in the second quarter, as well higher house prices--the first increase in more than a year.

Fueling growth in the second quarter was a 0.8 percent rise in household and government consumption, adding 0.5 percentage points to GDP, according to the government statistician. Exports rose 1 percent, contributing 0.2 percentage points to GDP.

Working against growth was a record rundown in company inventories although economists said this reflected an inability of firms to keep up with rising consumer demand.

Economists said the pace of expansion vindicated the aggressive economic stimulus put in place to combat the global crisis, but also highlights the need for policy makers to begin swiftly winding down the efforts. Stimulus plans valued at about 70 billion Australian dollars (US$58.66 billion) were implemented in the crisis.

Economic forecasts

With stronger than expected economic growth, Reserve Bank Governor Glenn Stevens kept the cash rate at 3 percent. The RBA was predicting GDP would rise 0.5 percent this year. It sees GDP growing 2.25 percent in 2010.

“The fact that Australia avoided a negative number is a major plus,” said economists at Westpac. “Despite the upside surprise from headline GDP it does not strengthen the case for a more urgent interest rate increase.”

The Economist Intelligence Unit believes that Australia will manage to avoid recession this year and turn in an annual average growth rate of at least 0.4%, thanks to the resilience of consumers and positive investment data. EIU forecast that the economy will strengthen further in 2010, growing by at least 1.2%. However, the Australian Stock Exchange’s All Ordinaries index remains well below its mid-2007 peak and so a negative wealth effect remains still at work, since share ownership is high in Australia. Private consumption is forecast to grow by an average of 1.5% in 2009-10 and while private investment is expected to decline on average this year (and rise by just 0.7% in 2010), the increase in investment in the second-quarter is encouraging, implying that some businesses are again looking to expand. The foreign balance will contribute positively to GDP in 2009 as continued demand expansion in China props up export growth, while imports collapse owing to low domestic demand.

Australian CPI rose in the 3 months through June

The consumer prices index gained 0.5 percent from the first quarter, when it advanced 0.1 percent, the Bureau of Statistics said. Annual core inflation was 4.2 percent, which is above the central bank’s target range of 2 percent to 3 percent.

Health costs rose 2.3 percent in the second quarter and prices of household contents and services advanced 2.2 percent. By contrast, banking services charges fell 1.7 percent and food slipped 0.9 percent. The annual headline inflation rate slowed to 1.5 percent from 2.5 percent.
The Reserve Bank’s core inflation measures, which exclude the largest price increases and declines, were also published. The weighted-median gauge of inflation advanced 0.8 percent in the quarter for an annual increase of 4.2 percent, the eighth quarter that the measure has held above the Reserve Bank’s target range.

Australia’s monetary board left the overnight cash rate target at 3 percent on July 7for a third month after cutting it by a record 4.25 percentage points between September and April.

Consistent with the Board’s forward-looking approach to monetary policy, this rapid and large easing of monetary policy was made in anticipation of a very weak domestic economy and a decline in inflation from elevated levels. At its meetings since April, the Board has held the cash rate constant at 3 percent. Over much of this period, it judged that the inflation outlook provided some scope for a further reduction in the cash rate to below 3 percent if that were needed. However, the recent stronger-than-expected economic data and the general improvement in sentiment both in Australia and abroad have reduced the likelihood that a further reduction will be required.