Signs Australia’s economic expansion is spreading from the mining industry to households boosted the case for the nation’s central bank to resume the Group of 20’s most aggressive round of interest-rate increases.
The biggest quarterly surge in consumer spending in three years fueled a 1.2 percent gain in gross domestic product last quarter, the Bureau of Statistics said in Sydney yesterday. The GDP rise was the most since 2007, and confounded the median of 23 estimates in a Bloomberg survey for a 0.9 percent increase.
Economic growth is broadening from the nation’s mining industry, which is undergoing a record investment boom to feed Chinese demand for iron and coal, to households that account for more than half of GDP. Chances have increased that central bank Governor Glenn Stevens will boost rates again before the end of the year, say analysts at UBS AG and Nomura Australia Ltd.
“This is not the cautious consumer the RBA has been looking for to manage demand pressures and limited spare capacity evident in the construction and mining sectors,” said Scott Haslem, a senior economist UBS in Sydney. The central bank will boost the benchmark rate to 5.25 percent by mid-2011 from 4.5 percent, “with the likelihood that the RBA will be back in action before the end of this year,” he said.
Australia’s dollar rose the most since June yesterday after the release, before surrendering some of the gains following a government report today showing a smaller trade surplus than forecast for July. The currency fell 0.5 percent to 90.73 U.S. cents at 11:42 a.m. in Sydney after yesterday’s 2.4 percent jump.
The currency has gained 8.8 percent against the U.S. dollar in the past 12 months, the second-best performer among the world’s 16 most actively traded currencies.
Household spending increased 1.6 percent in the quarter, the biggest gain since April to June of 2007, contributing 0.9 percentage point to GDP, yesterday’s report showed. Exports, which rose 5.6 percent, added 1.1 percentage points to growth.
The jump in household spending last quarter also outpaced the 1.3 percent advance in the June quarter of 2009, when consumers benefited from the government’s decision to distribute more than A$20 billion ($18 billion) in cash, and the Reserve Bank slashed borrowing costs to a half-century low of 3 percent.
The GDP figures “dispel the notion that Australian growth is predominantly based on mining and little else,” said Stephen Roberts, a senior economist at Nomura in Sydney. “There are also several signs that spending will remain strong through the rest of 2010,” including a 5.1 percent quarterly jump in disposal incomes, he added.
“The RBA will hike in November,” Roberts predicted.
The nation recorded a A$1.89 billion trade surplus for July, less than the median estimate of 22 economists surveyed by Bloomberg of A$3.1 billion, as exports of coal and iron ore fell, further easing concern about a so-called two-speed economy.
While mining and services output rose 1.3 percent last quarter, that gain that was matched or beaten by five other industry groups led by construction, which surged by twice that amount, Roberts said.
Reports published this week also suggest the expansion will continue. Retail sales rose 0.7 percent in July and home- building approvals unexpectedly advanced for the first time in four months.
Australia’s economy grew 3.3 percent from a year earlier, yesterday’s report showed. Economists forecast a 2.8 percent expansion. By contrast, GDP in the U.S. rose 3 percent in the second quarter and Japan’s increased 2 percent.
Policy makers expect Australia’s annual growth to accelerate to 4 percent by the end of 2012, boosted by projects such as Chevron Corp.’s A$43 billion Gorgon natural gas venture in Western Australia, potentially stoking inflation pressures.
“History tells us that inflation can be a problem during resources booms, and while there are grounds for thinking it will be less of a problem this time than in the past, we need to remain alert to the risks,” central bank Deputy Governor Ric Battellino said last month.
Manufacturing in China, Australia’s largest trade partner, grew at a faster pace in August after the weakest gain since February 2009 in the previous month, signaling that the economy’s slowdown will be limited, a report showed yesterday.
“The downside to strong growth is that inflation pressures are building and this should eventually see tight monetary policy,” said Kieran Davies, chief economist at Royal Bank of Scotland Group Plc in Sydney. “The global outlook is more uncertain, but unless Asia falls in a hole or global financial markets freeze up again, we see the Reserve Bank lifting interest rates later this year.”
Still, there are signs that parts of Australia’s economy may slow. A report yesterday by the Australian Industry Group and PricewaterhouseCoopers showed manufacturing growth eased in August to the weakest pace in five months, partly as uncertainty erupted about the outcome of last month’s national election.
Neither Prime Minister Julia Gillard nor opposition leader Tony Abbott gained a majority in the Aug. 21 election, meaning one side must win negotiations with independent lawmakers to form a government. Those talks continue this week.
Concerns about slowing global growth may prompt policy makers to keep the overnight cash rate target at 4.5 percent on Sept. 7 for a fourth straight month, according to all 23 economists surveyed by Bloomberg late last week. The central bank raised borrowing costs six times from October to May.
Stevens will probably boost Australia’s benchmark rate in November and December, according to Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd.
Increased investment by mining companies “will put tremendous pressure on resources and ultimately prices in the economy,” Melbourne-based Hogan said. “The RBA must lean into the domestic economy to free resources for this investment or risk a burst of inflation.”