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Australia’s Slowdown Suggests RBA May Need to Do More: Economy

Mining in Australia
Conveyor belts sit atop pylons at the crushing plant at Fortescue Metals Group Ltd.'s Cloudbreak iron ore operation in the Pilbara region of Western Australia. Photographer: Carla Gottgens/Bloomberg

Australia’s economy expanded slower than economists forecast last quarter after households boosted savings, suggesting the central bank may need to do more to spur spending as a mining investment boom wanes. The Aussie fell.

Third-quarter gross domestic product advanced 0.6 percent from the prior three months, when it rose a revised 0.7 percent, government data showed, versus economists’ forecast for a 0.7 percent gain. Growth was 2.3 percent from a year earlier -- the third-straight quarter below 2.5 percent and less than economists’ estimates for a 2.6 percent expansion.

The local currency dropped to a three-month low as traders boosted bets the Reserve Bank of Australia will add to its 2.25 percentage points of interest rate cuts since late 2011. The RBA is seeking to boost industries such as residential construction and compensate for lower planned spending on mining projects. Governor Glenn Stevens kept borrowing costs unchanged yesterday and said the currency needs to fall further to rebalance growth.

“It’s a fairly disappointing report,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney, who predicts the RBA will cut rates in the second quarter. “Household consumption was weaker than expected and there was a rise in the savings rate. The risk is we’re stuck in a sub-par growth economy for a while.”

The local dollar fell, trading at 90.36 U.S. cents at 6:02 p.m. in Sydney, from 91.36 cents before the release. Traders are pricing in a 22 percent chance of a quarter percentage point rate cut at the central bank’s next meeting in February, compared with 17 percent earlier. Three-year Australian government bold yields fell 4 basis points to 3.08 percent.

More Saving

Today’s report showed household spending climbed 0.4 percent in the three months through September, adding 0.2 percentage point to GDP growth. The household savings ratio advanced to 11.1 percent in the third quarter from a revised 10.2 percent in the prior three months, it showed.

The nation’s terms of trade, or export prices relative to import prices that have driven national income growth for the past decade, declined 3.3 percent last quarter from three months earlier, the report showed.

Australia’s economic growth was driven by higher exports as the mining boom transitions from investment to the less labor intensive production phase.

“Net exports were responsible for 90 percent of the growth in the economy in the past year,” Treasurer Joe Hockey told reporters in Canberra today after the release. “As mining investment drops from around 8 percent of GDP to somewhere around 3 percent over the next three years, that’s going to create a growth hole in the economy over the next few years.”

Incomes Stall

The Treasury’s top economic forecaster David Gruen said last month Australia should brace for the weakest income growth in half a century in the coming 10 years. To maintain recent income growth levels would require labor productivity growth to average 3.2 percent a year for a decade -- something never achieved before, Gruen said.

“Unless we get back to productivity growth, back to some serious choices about economic policy it’s not going to last much longer,” Ross Garnaut, who advised former Prime Minister Bob Hawke during the 1980s overhaul of the Australian economy, said in an interview with Bloomberg Television today, referring to the nation’s 22 years of expansion. “We need to get back to policies that give us productivity growth and we need to reassess our expenditure.”

Budget Challenges

While confidence has revived since Tony Abbott’s coalition restored majority government on Sept. 7, budget deficits confronted by the federal and state governments indicate fiscal tightening will weigh on growth. The Treasury predicts unemployment will rise to 6.25 percent next year. The jobless rate was 5.7 percent in October.

“It’s still a cautious outlook,” said David de Garis, senior economist at National Australia Bank Ltd. in Melbourne. “The dwelling and investment story is really a stop-start story. It keeps the easing bias well and truly in play.”

The Aussie climbed almost 50 percent in the four years ended Dec. 31 as the nation escaped the 2009 global recession and the China-led commodities-investment boom spurred growth. That squeezed manufacturers and tourism operators in Australia’s southeast, spurring job losses.

The RBA is balancing low borrowing costs that are driving up housing prices against forecast growth of about 2.5 percent in 2014, less than the 3 percent average of the past 10 years.

‘Below Trend’

“The economy has been growing a bit below trend over the past year and the unemployment rate has edged higher,” Stevens said in yesterday’s statement after leaving rates unchanged at 2.5 percent. “This is likely to persist in the near term, as the economy adjusts to lower levels of mining investment. Further ahead, private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook.”

Separately, the government today reached an agreement with the Greens party that holds the balance of power in Australia’s upper house, or senate, to scrap the nation’s debt ceiling. Under the terms of the deal, the government will be required to justify each A$50 billion increase in debt through parliamentary reports, Greens leader Christine Milne told reporters in Canberra.

The government had earlier been blocked in efforts to raise the ceiling to A$500 billion. It had said the current A$300 billion limit would be breached this month.

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