Stevens Signals Key Rate on Hold as Australian Growth Rebounds

Australia’s Economy Grew More Than Estimated Last Quarter
Ferries are moored at the Circular Key passenger terminal in Sydney. Compared with a year earlier, the economy expanded 1.4 percent in the second quarter, today’s report showed. Economists forecast a 0.7 percent year-on-year expansion. Photographer: Sergio Dionisio/Bloomberg

Australia’s central bank Governor Glenn Stevens signaled he’s prepared to extend a pause in interest rates as global market turmoil threatens an economy that grew last quarter at the fastest pace in four years.

Second-quarter gross domestic product advanced 1.2 percent from the previous three months, when it fell a revised 0.9 percent, a Bureau of Statistics report released today in Sydney showed. Stevens, speaking earlier in Perth, said households watching Europe’s debt crisis may hunker down and weaken demand compared with the central bank’s forecasts last month.

Australian households have boosted savings as assets such as stocks and houses decline in value after the Reserve Bank raised rates to a developed-world high of 4.75 percent, a level Stevens kept them at yesterday. Today’s GDP result was the biggest increase since the first quarter of 2007 and was driven by a recovery from natural disasters in the nation’s northeast.

“More forward-looking indicators would categorize the economy as very patchy,” said Savanth Sebastian, a Sydney-based economist at Commonwealth Bank of Australia, the nation’s largest lender. “The uncertain global economic environment will continue to depress consumer and business sentiment. The Reserve Bank will need to do its part by keeping interest rates on hold.”

The Australian dollar climbed after the report, buying $1.0589 as of 1:45 p.m. in Sydney, a 1 percent advance from yesterday. It gained against all 16 other major currencies for the first time since July 27.

U.S. Slowdown

Clouding Australia’s outlook is concern the world’s largest economy is slowing. Employment in the U.S. unexpectedly stagnated in August as employers became less confident in the strength of the recovery, and the jobless rate held at 9.1 percent, according to a Sept. 2 report.

“Periods of sudden increases in anxiety within international financial markets are moments when, if at all possible, it is good to be in a position to be able to maintain steady settings,” Stevens said today in Perth. “It is too soon to see much evidence of a concrete impact of these events on the global economy.”

Responding to questions from the audience, Stevens said policy makers need to keep an open mind on the timing and direction of any decision to change rates. He declined to speculate on the near-term outlook for monetary policy.

Today’s GDP report showed that compared with a year earlier, the economy expanded 1.4 percent in the second quarter. That was double economists’ forecast for a 0.7 percent expansion from a year earlier.


Household spending rose 1 percent in the second quarter, adding 0.5 percentage point to GDP growth, today’s report showed. Machinery and equipment increased 4.9 percent, adding 0.3 point to growth, the report showed. Exports gained 2.6 percent, adding 0.6 point to the expansion.

Imports advanced 4.3 percent in the three months through June, subtracting 1.1 percentage points, today’s report showed.

Mining investment in the 12 months ending June 30 next year is projected to be A$82.1 billion ($87 billion), 45 percent higher than in the 2010-2011 fiscal year, a report showed last week. Companies including BHP Billiton Ltd., the world’s No. 1 mining company, are expanding output to meet demand from China and India.

In contrast, consumers are curtailing spending as market routs in Europe and the U.S. threaten global growth and the outlook for exporters.

RBA Tightening

Australia’s central bank sought to restrain consumption with 175 basis points of rate increases from October 2009 to November. That was the most aggressive tightening for a developed economy coming out of the 2009 global recession.

The nation’s household savings ratio declined to 10.5 percent in the three months through June from 11.7 percent in the first quarter, today’s GDP report showed.

Stevens today reiterated the observation by his deputy, Ric Battellino, last month that in the past year economic growth seems to be turning out slower than expected and underlying inflation higher.

“A key question is whether that is just the vagaries of statistical noise and lags, or whether it is telling us that the combinations of growth and inflation available to us in the short term are less attractive than they seemed a few years ago,” he told the Western Australian Chambers of Commerce and Minerals & Energy today.

Inflation Target

The central bank’s two preferred measures of annual inflation accelerated to 2.7 percent in the second quarter, compared with a gain of about 2.3 percent in the first quarter. The RBA aims to keep underlying inflation in a range of 2 percent to 3 percent on average.

The RBA has relied on the Australian dollar’s strength to temper gains in consumer prices. The local currency has risen about 16 percent in the past year and reached $1.1081 on July 27, the highest level since it was freely floated in 1983.

BlueScope Steel Ltd., Qantas Airways Ltd. and Westpac Banking Corp. all announced plans last month to trim their workforces as Australian consumers retrench.

The nation’s jobless rate rose to 5.1 percent in July as employment dropped by 100 workers that month. A report tomorrow may show unemployment stayed at that level last month, with the number of workers increasing by 10,000, according to the median estimate of 24 economists surveyed by Bloomberg.

In Europe, there’s little sign of a rebound. France’s economy stalled in the second quarter, Germany’s expanded 0.1 percent and the U.K.’s gross domestic product grew 0.2 percent. Joblessness is rising from Russia to Belgium.

‘Complex Forces’

“More than at most times in my professional life, Australia’s economy faces a very unusual, and powerful, set of complex forces,” Stevens said today.

Even so, he said Australia is in a good position to face the present challenges, with record-high terms of trade, unemployment near 5 percent, a stable financial system and “respected” sovereign credit globally.

Today’s GDP report showed the terms of trade, or export prices relative to import prices, rose 5.4 percent last quarter.

“We have our problems, but with some good sense and careful judgment we ought to be able to navigate what lies ahead,” Stevens said today.

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