Australian economy picks up steam

BY CHRIS ZAPPONE

Australia’s economy accelerated in the final three months of 2009 as governments and households increased spending.

Gross domestic product, the broadest measure of the nation’s economic activity, rose 0.9 per cent in the final three months of the year.

Today's increase follows a series of strong economic data, including rising retail sales and a swelling labour market, and will add to pressure on the Reserve Bank to follow up on yesterday's rise in official interest rates with further increases in coming months.

"It just feeds into the story they keep telling that interest rates will have to keep rising,'' said Macquarie economist Brian Redican, adding that the figures will probably prompt the RBA to raise its forecast for economic growth.

Welcoming the latest figures, Treasurer Wayne Swan said they provided a sound base for a solid economic recovery.

"These national accounts represent a very solid outcome for the economy, for an economy which is the envy of the developed world,'' Mr Swan said.

He reiterated the government's belief that the stimulus helped the nation recover from the economic crisis that sent other nations into recession.

During the global financial meltdown, Australia registered only one quarter when the economy shrank - the 0.8 per cent contraction in the December 2008 quarter.

Rates view

Before today's national accounts figures, markets had been pricing in about a 1-in-5 chance that the Australian central bank would raise rates again in April.

Yesterday's quarter-point increase has been passed on by most of the major banks, adding about $46 to the average monthly mortgage payments on a typical $300,000 loan.

Today's GDP increase was in line with economists' predictions, with the pace of growth quickening from the revised 0.3 per cent rise in the September quarter.

From a year earlier, the economy expanded at a 2.7 per cent clip, the fastest pace since the March quarter of 2008 - coinciding with the first full quarter of the Rudd government coming to power.

The Australian dollar posted a modest gain on the news, rising to US90.6 cents before easing back.

Stocks initially added to their morning advance to be up about 0.8 per cent for the day, before also retreating slightly in early afternoon trading.

GDP components

"The strength of domestic demand up 2 per cent in the quarter - it's the best reflection of the underlying strength of the economy,'' said Mr Redican.

All the major sectors of the domestic economy added to growth for the quarter. An increase in government expenditure added the equivalent of 0.2 percentage points to the 0.9 per cent quarterly GDP increase.

Households added even more to the economy's spurt, contributing 0.4 percentage points to the quarterly rise.

Within this sector, purchases of cars - up 6.8 per cent - and rents and other dwelling services contributed the most.

The biggest drag on the economy came from the wider trade gap, with the rise in imports subtracting 1.6 percentage points from the growth rate - a contribution more than matched by domestic activity.

In another sign of the economy's strength, figures out today show the number of vehicles sold in Australia rose 17.1 per cent in February, compared with a year ago, according to figures published by the Federal Chamber of Automotive Industries.

That was up from a 9.8 per cent increase, year-on-year, in January.

Future prospects

Overall fixed capital formation - a proxy for investment in the economy - rose 4.8 per cent in seasonally adjusted terms.

Within this sector, investment in machinery and equipment surged 10.9 per cent as the resources boom resumed.

Economists, though, are divided about how much momentum the economy has, particularly after the RBA four interest rate rises since October - with commercial lenders lifting their lending rates by even more.

"I don't see the same order of strength running through into the first quarter, I see 0.7 per cent or even less'' for the first quarter, Stephen Roberts, economist at Nomura, told Reuters.

"Growth you saw in Q4 won't persist, that implies slow progress with interest rates,'' Mr Robert said. ''Also the household...sector is so much more indebted this cycle, that it was in the previous tightening cycle. Small interest moves tend to hurt a lot more."

The services sector, one to the economy's largest, also remains in the doldrums, according to a survey out today.

And the drop in unemployment to 5.3 per cent in January while signaling an improvement in prospects for those seeking work may also start to constrain growth.

"Under-investment in key infrastructure means the economy is very likely to be bumping up against the same capacity constraints that blighted the last period of expansion," said JP Morgan economist Stephen Walters.

"Already, there are signs of skill shortages and wage pressure, and there soon will be more strains placed on capacity in product markets too. The likely flow-through to inflation means the RBA's tightening cycle is far from over," said Mr Walters.

For its part, the Australian government plans to limit its contribution to the economy's revival, imposing its 2 per cent cap on spending growth in the 2010-11 budget, to be delivered in May, Treasurer Swan told reporters.

The government has promised to cap government spending at 2 per cent when growth returned to trend. Mr Swan said government forward estimates already met the 2 per cent cap.

- © Fairfax NZ News