Australia's Economy Grows Faster-Than-Expected

Australia's economy grew twice as fast as economists forecast in the first quarter, driving the nation's currency higher on speculation the central bank may raise interest rates this year.

Gross domestic product rose 0.6 percent from the fourth quarter, when it increased a revised 0.7 percent, the Bureau of Statistics said in Sydney today.

Stronger-than-expected growth, driven by consumer spending, threatens to stoke the fastest inflation since 1991, adding to pressure on the central bank to increase rates. Governor Glenn Stevens, who raised the benchmark to a 12-year high of 7.25 percent in March, left borrowing costs unchanged for a third month yesterday, saying there is evidence the economy is slowing.

The Australian dollar jumped to 95.48 U.S. cents at 12:02 p.m. in Sydney from 94.92 cents before the report was released. The yield on the two-year government bond climbed 12 basis points, or 0.12 percentage point, to 6.88 percent.

Australia's $1 trillion economy is benefiting from a mining boom that has pushed unemployment close to the lowest in more than three decades as resources companies such as Rio Tinto Group boost hiring to meet demand from China for iron ore and coal.

The nation's terms of trade, a measure of income from exports, is forecast by the central bank and government to rise 20 percent this year.

Iron ore output at BHP Billiton Ltd., the world's biggest miner, rose 22 percent to a record 28 million metric tons in the three months through March, the company said on April 23.

AWB Ltd., Australia's largest wheat exporter, said on May 21 that first-half profit rose 89 percent because of increased sales by its Landmark farm merchandize unit.

The nation's economic expansion, now in its 17th year, has driven the unemployment rate to 4.2 percent and pushed annual inflation beyond the central bank's target range of between 2 percent and 3 percent.

Household spending contributed 0.4 percentage points to quarterly growth, today's report showed. Construction and national defense spending added 0.3 percentage points each.

Concern that a record jobs boom will drive up wages was a key reason central bank policy makers increased borrowing costs in March for the fourth time in seven months.

Stevens signaled yesterday that the bank is prepared to raise rates again if a slide in consumer

Other reports suggest the economy is slowing.

Retail sales dropped in April by the most in almost 12 months as households cut spending on food and recreational goods. Business confidence slumped in April to the weakest level since the 2001 terrorist attacks in the U.S., and home-loan approvals declined in March to the lowest reading in almost three years.

Australia's All Ordinaries Index of stocks plunged 16 percent in the first quarter, the biggest decline since 1987, amid concern the U.S. housing recession is spreading to Europe and Asia, eroding growth in the nation's biggest export markets.

The impact of rising interest rates and market volatility is being partially offset by the Australian currency's 8.3 percent gain this year against the U.S. dollar, helping buttress domestic demand for imported goods.


Australia, Bloomberg
6/3/2008 7:24:08 PM