Bloomberg News

Australia GDP Shrinks on Exports as Spending Buoys Currency

June 01, 2011

(Updates currency in fifth, RBA interbank cash rate futures in eighth paragraphs.)

June 1 (Bloomberg) -- Australia’s economy shrank in the first quarter by the most in 20 years as floods hurt exports, even as stronger business investment underscored the central bank’s forecast for a rebound in the second half of the year.

Gross domestic product fell 1.2 percent from the previous three months, when it rose a revised 0.8 percent, the Bureau of Statistics said in Sydney today. Exports slumped 8.7 percent, subtracting 2.1 percentage points from GDP growth, today’s report showed, while machinery and equipment spending jumped 6 percent, adding 0.4 point.

The nation’s dollar rose after the report showed the contraction was smaller than a drop of as much as 2 percent that economists including Goldman Sachs & Partners Australia Pty had forecast. While Reserve Bank of Australia Governor Glenn Stevens has held interest rates at 4.75 percent for the past five meetings to help Queensland state recover, investors today boosted bets he’ll raise borrowing costs by August.

“The market was braced for a really big negative so it’s a bit of a relief,” said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney. “The report looks mostly to be reflecting the impact of the Queensland floods on exports; outside of exports, domestic demand is actually pretty resilient.”

RBA Outlook

The local currency rose to as high as $1.0752 before trading at $1.0732 at 4:35 p.m. in Sydney from $1.0672 yesterday in New York. The RBA has pledged to look past data distorted by the natural disasters and said rates will need to rise “at some point” to contain inflation.

Household spending, which accounts for 55 percent of GDP, increased 0.6 percent in the first quarter, adding 0.3 percentage point to growth, today’s report showed. Dwellings rose 4.6 percent, adding 0.3 point.

Compared with a year earlier, the economy expanded 1 percent in the first quarter, today’s report showed, matching economists’ median forecast.

Traders bet there’s an 12 percent chance Stevens will boost the benchmark rate by a quarter of a percentage point to 5 percent at a meeting June 7, a 32 percent chance in July and 50 percent in August, interbank cash-rate futures showed.

The quarterly decline was the biggest drop since Australia’s last recession in 1991 and compared with the median of 25 estimates in a Bloomberg News survey for a 1.1 percent fall in GDP.

Regional Slowdown

Global growth, including the economies of some of Australia’s biggest trading partners, shows signs of weakening.

China’s manufacturing expanded at the slowest pace in nine months in May, a survey of companies released today showed. India’s growth in three months to March 31 was the weakest in five quarters, and Japan’s industrial production rose less than economists forecast in April, reports showed this week. Those three countries accounted for 51 percent of Australia’s total exports so far this year.

Today’s GDP data showed Australia’s household savings ratio climbed to 11.5 percent from 9.7 percent in the previous quarter, the highest level since 2009. Insurance payouts following the January floods contributed to the rise, said Bill Evans, Westpac Banking Corp.’s chief economist.

The report, coupled with Australia’s government budget released last month that aims to cool inflation and return to a surplus by 2013, will make it difficult for the RBA to raise rates next week, economists said. “However, the RBA is almost certain to maintain the strong hawkish rhetoric to ensure that markets and the community ‘have been warned,’” Evans said.

Aussie’s Advance

The nation’s currency has risen 29 percent in the past year as companies including BHP Billiton Ltd. increase hiring to meet Chinese and Indian demand for iron ore and coal, pushing unemployment below 5 percent.

Driving the economy is mining investment the government estimates will be A$76 billion ($82 billion) next fiscal year. BHP, the world’s biggest mining company, is expanding its iron ore operations in Western Australia state’s Pilbara region.

The local dollar reached $1.1012 on May 2, the highest level since it was freely floated in 1983. The currency’s strength is hurting exporters including Henderson, Western Australia-based shipbuilder Austal Ltd.

The RBA’s benchmark interest rate of 4.75 percent is the developed world’s highest, raising debt payments for homeowners. Myer Holdings Ltd. and David Jones Ltd., Australia’s biggest department store chains, reported declines in quarterly sales on May 11.

Rebound Predicted

In a quarterly review released last month, the RBA forecast growth will be 4.25 percent this year, unchanged from its February estimate. Consumer prices will rise 3.25 percent over the period, from a previous prediction of 3 percent, and core inflation will quicken to 3 percent from 2.75 percent, it said.

Disrupting trade were floods in Queensland in January that Prime Minister Julia Gillard called the nation’s most expensive natural disaster. Queensland produces 80 percent of steel-making coal exports from Australia, the world’s biggest supplier, and grows more than 30 percent of the country’s fruit and vegetables.

The impact was reflected in the GDP breakdown in states at the center of Australia’s biggest resources boom. Queensland’s economy contracted 0.6 percent in the three months through March from the previous quarter, while Western Australia’s GDP surged 3.2 percent.

Expanding resource projects helped Australia post record employment growth last year before hiring cooled in the first four months of 2011. Still, the number of unemployed Australians in April fell to the lowest level since January 2009.

“The economy will rebound in the second quarter, but it will take some time before the coal industry, in particular, is back up to full speed,” said Stephen Walters, chief economist for Australia at JPMorgan Chase & Co. in Sydney.

--With assistance from Daniel Petrie in Sydney. Editor: Brendan Murray

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net;

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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