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Australia GDP Grows at Half the Pace Economists Forecast; Bond Yields Drop

Australia’s economy expanded at half the pace economists forecast last quarter as a housing slump deterred consumer spending, sending bond yields falling and the local currency to a six-week low.

Gross domestic product advanced 0.4 percent in the fourth quarter from the previous three months, when it rose a revised 0.8 percent that was weaker than previously reported, a Bureau of Statistics report showed today in Sydney. The result compared with the median of 25 estimates in a Bloomberg News survey for a 0.8 percent gain.

The report covers a period when Europe’s sovereign-debt crisis weighed on Asian demand for commodities that prompted Reserve Bank Governor Glenn Stevens to make back-to-back interest-rate cuts for the first time since 2009. Investors increased bets he will lower borrowing costs next month as a A$456 billion ($481 billion) pipeline of resource projects driven by companies such as BHP Billiton Ltd. fails to cushion a slump in manufacturing and tourism hit by a strong currency.

“With GDP growth below trend an argument can be made for a further rate cut,” said Joshua Williamson, a senior economist at Citigroup Inc. (C) in Sydney. “The slowdown in consumer spending despite two interest-rate cuts suggests a soft inflation result this quarter would provide room for a further easing in financial conditions.”

Market Reaction

The currency fell after the report to as low as $1.0509, the weakest level since Jan. 25. Government bonds advanced, with yields on 10-year debt falling as low as 3.94 percent, seven basis points, or 0.07 percentage point, below yesterday’s close.

Traders see about a 36 percent chance the central bank will cut borrowing costs by a quarter percentage point to 4 percent next month, Bloomberg calculations based on interbank cash-rate futures show, up from 30 percent yesterday after Stevens held.

Today’s report showed household spending rose 0.5 percent in the fourth quarter, the poorest showing since the first quarter of 2010, adding 0.3 percentage point to GDP growth. Housing construction declined 3.9 percent in the fourth quarter, the worst in almost three years, subtracting 0.2 point from the expansion, today’s report showed.

Australian house prices plunged by the most on record in 2011 as global economic uncertainty and concerns about its impact at home restrained demand. An index measuring the weighted average of prices for established houses in eight major cities slid 4.8 percent from a year earlier, a government report showed Feb. 1, the biggest calendar-year drop since the data began in March 2002.

Tourism Slump

Today’s GDP report showed accommodation and food services, spanning the nation’s tourism industry, fell by 2.2 percent last quarter as the currency’s strength encouraged Australians to vacation abroad.

“The high dollar has contributed to a decline in travel to the traditional domestic holiday destinations, with Australians traveling overseas in ever increasing numbers,” RBA Deputy Governor Philip Lowe said in a speech earlier today. “This has created quite difficult conditions for parts of the industry with, for example, room occupancy rates along the Queensland coast having fallen over recent years.”

The Australian dollar, the world’s fifth-most traded currency, has strengthened about 3 percent this year as investors bet the economy will accelerate. It touched a six- month high of $1.0856 on Feb. 29 after the European Central Bank awarded 529.5 billion euros ($696 billion) in a second round of three-year loans to banks.

‘Sub-Trend’

Compared with a year earlier, the economy expanded 2.3 percent in the fourth quarter, today’s report showed. Economists forecast a 2.4 percent year-over-year gain. The annual figure represented a fourth consecutive year of “sub-trend growth,” Westpac Banking Corp. (WBC) said in a note to clients today.

“The persistence of sub-trend growth for four consecutive years is a key reason for current labor market weakness and the likelihood that unemployment will move higher during 2012,” wrote economists led by Sydney-based Bill Evans, Westpac’s chief economist.

Macquarie Group Ltd. (MQG), the nation’s largest investment bank, today released an assessment of floods that have inundated New South Wales. About 75 percent of Australia’s most populous state is affected by flooding as rainfall causes rivers to burst their banks, with 12,900 people forced to leave their homes.

‘Far More Muted’

The economic impact this time will be “far more muted” than from floods in the first quarter of 2011 that caused the economy to contract and boosted inflation,’’ said Brian Redican, senior economist in Sydney at Macquarie.

Australian business profits unexpectedly dropped in the three months through December by the most in two-and-a-half years as earnings weakened at mining and financial companies, reflecting weaker commodity prices and the weakest demand for home lending since 1977.

BHP Billiton Ltd. (BHP), the world’s biggest mining company, reported a 5.5 percent drop in first-half profit, the first decline since 2009, as rising costs and lower output and prices halved base metals earnings. Net income was $9.9 billion in the six months ended Dec. 31, from $10.5 billion, a year earlier, the Melbourne-based company said Feb. 8.

Westpac, Australia’s second-largest bank, reported first- quarter profit that was lower than a year earlier as rising funding costs squeezed the profitability of its lending. Unaudited cash earnings in the three months ended Dec. 31 were A$1.5 billion, the Sydney-based bank said Feb. 16. It posted cash earnings of A$1.55 billion a year earlier.

Rate Pause

The RBA yesterday held its benchmark rate at 4.25 percent for a second month, while noting it has scope to lower borrowing costs as Europe remains a potential source of shocks “for some time yet.”

“Housing prices have shown some sign of stabilizing recently, after having declined for most of 2011, but generally the housing market remains soft,” Stevens said yesterday.

Government spending increased 1 percent, adding 0.2 point to growth, today’s report showed. The nation’s household savings ratio dropped to 9 percent in the three months through December, the lowest since the second quarter of 2010, from 9.6 percent in the third quarter, today’s report showed.

“The sluggish pace of the economy keeps the door open to another rate cut,” said Craig James, a senior economist at Commonwealth Bank of Australia, the nation’s biggest lender, in Sydney. “Not only has data confirmed that the economy is just chugging along, timelier indicators suggest there has been little improvement in 2012.”

Treasurer Wayne Swan said the economy’s performance in the final three months of last year was “solid given the world was facing the most dire conditions in the global economy since the height of the financial crisis” in 2008-09.

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

To contact the editor responsible for this story: Shamim Adam at sadam2@bloomberg.net

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