Australia’s Slowest Growth Since ’11 Spurs Rate-Cut Bet: Economy

Photographer: Carla Gottgens/Bloomberg

Pedestrians and a cyclist cross the Sandridge Bridge that spans the Yarra River in central Melbourne. The central bank cut its benchmark rate to 2.75 percent in May before pausing at yesterday’s meeting. Close

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Photographer: Carla Gottgens/Bloomberg

Pedestrians and a cyclist cross the Sandridge Bridge that spans the Yarra River in central Melbourne. The central bank cut its benchmark rate to 2.75 percent in May before pausing at yesterday’s meeting.

Australia’s economy expanded at the slowest annual pace in almost two years as manufacturers and builders detracted from growth, sending the nation’s currency lower as traders increased bets on further interest-rate cuts.

Gross domestic product expanded 2.5 percent in the first quarter from a year earlier, the weakest reading since the second quarter of 2011, a Bureau of Statistics report released in Sydney today showed. Economists predicted a 2.7 percent gain.

The Reserve Bank of Australia has slashed borrowing costs to 2.75 percent to combat currency strength that prompted Ford Motor Co. to cease operations and eliminate 1,200 jobs. Today’s report showed some of the nation’s most employment-intensive industries that the central bank has sought to stoke with record-low interest rates remain subdued.

“You’ve got a much lower reading coming out of what you might call the guts of the economy than you’ve got coming out of the total economy,” National Australia Bank Ltd. Chief Economist Alan Oster said. “I still think they’ve got one more rate cut.”

The local dollar declined to 95.61 U.S. cents at 5:06 p.m. in Sydney, from 96.35 cents before the release. Overnight index swaps show a 63 percent chance the RBA rate will be 2.5 percent or lower after the board meets Aug. 6, up from 49 percent odds shown at 11 a.m. in Sydney.

Growth advanced 0.6 percent from the previous three months, when it expanded at the same pace, today’s report showed. The result compared with the median of 25 estimates in a Bloomberg News survey for a 0.7 percent gain.

Manufacturing Drag

Manufacturing fell 0.8 percent amid the local currency’s longest stretch above parity with the U.S. dollar since it was freely floated in 1983, and construction dropped 2.1 percent in the first quarter from three months earlier. Exports climbed 1.1 percent and non-dwelling construction jumped 7.6 percent, the data showed.

“We are involved in a transition from mining sources of growth to non-mining sources of growth and that’s why the monetary policy settings of the Reserve Bank are so important,” Treasurer Wayne Swan told reporters in Canberra after the release. “I thought the Australian dollar would start to come down when the U.S. economy started to grow more strongly and indeed that’s largely what has occurred in recent times.”

Household spending rose 0.6 percent in the first quarter, adding 0.3 percentage point to GDP growth, today’s report showed. Machinery and equipment fell 6.9 percent, subtracting 0.4 percentage point from GDP growth. Changes in inventories reduced growth by 0.4 percentage point.

Spending Rises

“Growth is materially below trend, with domestic expenditure contracting,” Westpac Banking Corp. (WBC) economists including Andrew Hanlan wrote in a research note today. “On that basis alone, demand is certainly in need of support. That reinforces our view that in the medium term the cash rate will have to fall further, ultimately reaching 2 percent.”

The report showed state final demand dropped 3.9 percent in Western Australia, the hub of the nation’s mining investment boom, in the first quarter from three months earlier, and plunged 10.2 percent in the Northern Territory. In Queensland, another resource-rich state, demand increased 0.6 percent from the final three months of 2012.

Elsewhere in the region, services activity in China, Australia’s biggest trading partner, increased in May, according to a report compiled by Markit. The HSBC China Services PMI rose to 51.2 last month, compared with 51.1 in April.

More Saving

Taiwan reported inflation eased in May, while Philippine price gains were less than economists estimated. The European Union’s statistics office will release revised GDP figures for the first quarter, while economists surveyed by Bloomberg forecast Poland’s central bank will cut borrowing costs today. U.S. data scheduled to be released include April factory orders and private payrolls for May.

Australia’s household savings ratio rose to 10.6 percent in the three months through March from a revised 10.4 percent in the fourth quarter, today’s report showed.

Australia’s currency averaged about $1.03 in the past two years, compared with about 73 cents in the prior two decades, spurred by the resource investment boom and near-zero interest rates in the U.S. and Japan. The RBA says some of its earlier rate reductions were aimed to help offset the drag on growth from the Aussie’s strength.

Ford announced on May 23 it would end production in the country after nine decades. The closure was a blow to Prime Minister Julia Gillard, whose Labor party is trailing in polls ahead of a Sept. 14 election.

The central bank cut its benchmark rate to 2.75 percent in May before pausing at yesterday’s meeting. “Growth over the past year has been a bit below trend,” Governor Glenn Stevens said in the statement accompanying the rate decision.

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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