Thursday, September 08, 2011

We're back. And when the mines start moving it will be even better.

The Australian dollar has soared and the futures market has scaled back bets on interest rate cuts after a surprising surge in consumer spending in the June quarter relegated Australia’s March quarter economic downturn to a blip.

Australia’s gross domestic product surged a bigger than expected 1.2 per cent in the three months to June led by reconstruction activity in Queensland, a bounce back in manufacturing and much faster than previously believed consumer spending.

Mining contributed not at all to the rebound, being held back by the delays in reopening mines.

As as added bonus the March quarter dive in GDP - previously believed to be 1.2 per cent - was yesterday revised back to a more mild 0.9 per cent, making economic growth positive over the first six months of the year and taking annual growth to 1.4 per cent.

While better than expected in recent Reserve Bank forecasts, the result is still well below the May budget forecast of 2.25 per cent for 2010-11 in year on year terms putting pressure on the projected early return to surplus...

Treasurer Wayne Swan said it was too early to tell whether the surplus would remain in tact, but said the figures were “a report card which ticked the box which says that the Australian economy is resilient and well positioned to deal with the challenges ahead domestically and internationally”.
On a state by state basis Queensland led the nation with a huge 3.5 per cent growth in state final demand in the quarter as businesses, governments and householders spent up to rebuild after the floods. Victorian demand grew at about the national average at 0.6 per cent while NSW demand was anemic, climbing at just 0.2 per cent, held back by a collapse of 11 per cent in housing construction and 2.3 per cent in business investment. Tasmania was the weakest state, going backwards 0.5 per cent.

The biggest surprise was a very healthy growth in inflation-adjusted consumer spending of 1 per cent in the quarter and 3.2 per cent over the year, well in excess of the inflation-adjusted retail sales which have been growing at just 0.3 per cent and 0.6 per cent.

Mr Swan called on the media and the opposition to stop focusing on the dismal retail environment and focus instead on the new places money was being spent.

“If you had been listening to the public debate over the last six months you would have sworn consumers weren’t spending anything, well consumers have been spending,” he told a Canberra press conference. “They’ve had good solid growth in their income, they’ve been rebuilding their balance sheets, but they’ve also been out there spending, just differently and perhaps more wisely.”

Spending grew strongly on recreation, culture and education - activities mainly not covered in the retail sales figures - and also on hotels, cafes and restaurants which are.

The Australian dollar jumped two-thirds of a cent on the news closing at 106.06 US cents, up from 105.39 US cents.

The futures market cut the implied probability of a 0.50 point rate cut at the next Reserve Bank board meeting from 62 per cent to 39 per cent as it became clear the economy was stronger than had been believed.

Shadow treasurer Joe Hockey dismissed the GDP as dated, saying “the fact of the matter remains that consumer confidence is flatlining, business confidence is flatlining, and it needs leadership from Canberra”.

Ahead of the news Reserve Bank governor Glenn Stevens told an audience in Perth the economy was “ uneven and patchy” buffeted by “waves of positive and negative sentiment sweeping global markets”.

In considering rates the Bank had “judged it prudent to sit still”.

Published in today's SMH and Age

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