Australian GDP Pickup Suggests RBA Transition Working: Economy

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Shipping containers sit stacked at the Port of Fremantle in Perth, Australia.

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Employees pour molten steel into a ladle for mold making in the foundry at the Backwell IXL plant in Geelong, Australia. The Reserve Bank of Australia cut interest rates by 2.25 percentage points from late 2011 through August to spur domestic-driven growth and compensate for a mining investment slowdown. Close

Employees pour molten steel into a ladle for mold making in the foundry at the Backwell IXL plant in Geelong,... Read More

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Glenn Stevens, governor of the Reserve Bank of Australia. Today’s data suggest the economy is in better shape to withstand government budget cuts and a decline in resources projects, which Stevens has flagged as a headwind for growth. Close

Glenn Stevens, governor of the Reserve Bank of Australia. Today’s data suggest the economy is in better shape to... Read More

Photographer: Carla Gottgens/Bloomberg

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A sales assistant speaks with customers in a Uniqlo store in Melbourne, Australia.

Australia’s economy grew at the fastest pace in two years as surging exports and home building showed record-low borrowing costs are sustaining a 22-year expansion even as mining investment slows.

First-quarter gross domestic product advanced 1.1 percent from the previous three months, government data today showed, beating the 0.9 percent gain forecast in a Bloomberg News survey. The Aussie dollar climbed and bond yields rose.

Today’s data suggest the economy is in better shape to withstand government budget cuts and a decline in resources projects, which Reserve Bank of Australia Governor Glenn Stevens has flagged as a headwind for growth. He shifted to a neutral bias this year and has signaled a period of steady rates.

“Despite some perceptions to the contrary, the Australian economy is doing well,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia. “In fact it’s doing very well. The economy is growing comfortably above its trend or ‘‘normal’’ pace; inflation is under control; interest rates are at historic lows; productivity is solid; and home construction and exports are leading the way forward.”

The local dollar traded at 92.73 U.S. cents at 12:21 p.m. in Sydney, from 92.62 cents before the release. Benchmark 10-year bond yields climbed 7 basis points to 3.78 percent, heading for the biggest jump since May 22.

Compared with a year earlier, the economy expanded 3.5 percent in the first quarter, today’s report showed. The median forecast of economists was for a 3.2 percent rise.

Exports surged 4.8 percent in the first quarter from three months earlier, adding 1.1 percentage points to GDP growth, today’s report showed. Dwelling investment climbed 4.7 percent, adding 0.2 point to the expansion, it showed.

Housing Consumption

“The stronger growth evident in today’s numbers is welcome, but the composition of growth continues to highlight challenges faced by the economy,” Treasurer Joe Hockey said in a statement after the release. “The mining sector will continue to be a major contributor to GDP growth, but this will increasingly come from production and exports rather than construction and investment.”

Hockey last month announced cuts to spending on welfare and the public service and a new tax on the highest paid. Consumer confidence fell to its lowest level since August 2011, prior to the central bank’s most recent easing cycle, after the budget’s May 13 release.

Household consumption increased 0.5 percent, adding 0.3 percent to GDP growth, today’s report showed. Non-dwelling construction fell 2.7 percent, subtracting 0.2 percentage point.

The nation’s household savings ratio rose to 9.7 percent in the first quarter from a revised 9.6 percent in the final three months of last year, today’s report showed.

Economic Transition

The Reserve Bank of Australia cut rates to a record-low 2.5 percent to foster a transition to consumption and encourage industries like residential construction to offset declining mining investment.

Companies plan to spend A$137.1 billion in 2014-2015, a government report showed in Sydney last week. That was “well above” expectations and suggested “the transition of the Australian economy from mining investment to non-mining investment is occurring very smoothly,” said Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia.

The labor market has also held up, with the jobless rate remaining at a better-than-expected 5.8 percent in April. Lending too is responding to low borrowing costs, with private-sector credit expanding 4.6 percent in April from a year earlier, the fastest pace since March 2009, central bank data showed.

“Growth looks to have been somewhat firmer around the turn of the year,” Stevens said in yesterday’s statement announcing the decision to leave rates unchanged. “There has been some improvement in indicators for the labor market in recent months, but it will probably be some time yet before unemployment declines consistently.”

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

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Malcolm Scott, Victoria Batchelor

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