Business

Tue Jun 03 22:26:51 PDT 2008

SYDNEY, June 4 (Reuters) – Australia’s economy grew by more than expected in the first quarter, showing considerable resilience to high interest rates and surging living costs and adding to the risk that interest rates may have to rise again.

The income side of the economy was also strong as booming prices for Australia’s resource exports fattened profits and wages. *************************************************************

KEY POINTS:

- Q1 Gross Domestic Product 0.6 percent qtr/qtr, seasonally adjusted (median forecast 0.3 percent)

- Q1 GDP 3.6 percent vs year earlier (median 2.8 percent)

- Q1 final consumption expenditure 0.6 percent Q/Q

- Q1 gross fixed capital formation 1.6 percent Q/Q

- Q1 chain price index 0.7 percent Q/Q

- Q4 GDP was revised up to 0.7 percent from initial 0.6 pct

- For brief data tables click [ID:nSYU004500]

COMMENTARY:

SU-LIN ONG, SENIOR ECONOMIST, RBC CAPITAL MARKETS

"The surprise was a big rise in defence spending. Without that contribution, GDP would have been up 0.3 percent as expected. Despite the headline, private demand has clearly moderated and that’s what the Reserve Bank wants to see.

Still, it’s also clear the economy overall is proving more resilient than many assumed. Incomes were particularly strong, and there’s more of that coming in the second half through the terms of trade. That will only reinforce the RBA’s tightening bias. If rates are going anywhere this year, it’s up."

HELEN KEVANS, ECONOMIST, JP MORGAN

"The surprise was (the strength) in household consumption. In terms of the monetary policy, if the RBA (Reserve Bank of Australia) is looking for a significant slowing in the domestic demand, it doesn’t want to see those sort of numbers.

Going forward, we will be watching the domestic indicators quite closely, such as demand for credit and consumer and business confidence. Our forecast is for the RBA to be firmly on hold for the remainder of the year, but the risk is that another rate hike may be warranted if we don’t see that significant easing in domestic demand going forward."

ROB HENDERSON, CHIEF ECONOMIST MARKETS, NAB

"It looks like consumption is a little bit stronger and capex is a bit stronger than the partial indicators suggested.

This is a very lagging indicator, it doesn’t have a lot of impact with the RBA (Reserve Bank of Australia), but it certainly tells you the economy hasn’t fallen in a hole in the first quarter, it’s definitely slowed, but the rate of growth is still 3.6 percent over the past 12 months, that’s above trend.

If you annualise the past two quarters you’re looking at a number under 3 percent, which is where the RBA wants it to be, so it’s consistent with the slowdown the RBA is looking for."

STEPHEN ROBERTS, DIRECTOR OF RESEARCH, LEHMAN BROTHERS

"GDP was stronger than expected. There is still a softening trend in economic growth but not as pronounced as the market was expecting. It is soft enough to avoid another rate hike.

The surprises came from stronger-than-expected household consumption spending and gross fixed capital expenditure.

As expected real national disposable income was very strong."

MICHAEL WORKMAN, SENIOR ECONOMIST, CBA

"A bit stronger than expected and we’ve seen again history revised upwards, which indicates the strength of domestic activity. Consumer spending figures in the end turned out a lot stronger than the market expected, business investment kicked in pretty strongly and inflation measures are pretty high. Annual growth of 3.6 percent is pretty strong to say the least and this demonstrates that the monthly figures, like retail trade, are probably over-stating the weakness of the economy."

MARKET REACTION:

- The Australian dollar <AUD=> jumped half a U.S. cent on the report, which was much stronger than some had been betting on. Bond and bank bill futures <0#YBA:> slid on speculation the Reserve Bank of Australia (RBA) might need to raise interest rates again to truly cool the economy.

LINKS:

- The Australian Bureau of Statistics Web site is: www.abs.gov.au

- For all Australian news and data, 3000 Xtra users can click on <AUSTRALIA>

BACKGROUND:

- Median forecasts for GDP growth had been for a subdued 0.3 percent rise, though estimates ranged from a 0.2 percent fall to a 0.6 percent increase. Growth for the year was seen anywhere between 2.3 and 3.2 percent.

- Signs were that consumers cut back in the quarter, after a spending spree late last year, as rising fuel and living costs and higher interest rates eroded their purchasing power.

- A disappointing trade performance also weighed down on growth, with net exports taking around 0.7 percentage points off GDP.

- Private business investment was surprisingly weak in the quarter, though the mining sector remained buoyed by high commodity prices.

- Government spending was expected to be robust, perhaps being the single biggest contributor to GDP in the quarter. – The income side of GDP should be much stronger as employment, wages and profits all rose in the quarter, underpinned by the boomming commodity sector.

- The ABS defines GDP as the total market value of goods and services produced in Australia within a quarter after deducting the cost of goods and services used up in the process of production but before deducting allowances for the consumption of fixed capital.

($1=A$1.05)

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