Australia’s economic growth slowed last quarter in response to a stronger currency and weaker commodity prices, as central bank Governor Glenn Stevens indicated he wants to avoid cutting interest rates further.
Second-quarter gross domestic product advanced 0.5 percent from the prior three months, when it rose 1.1 percent, a Bureau of Statistics report showed today. Stevens, in a speech shortly after the release, said he is unwilling to drive up house prices even further to quicken a fall in unemployment, which jumped to a 12-year high in July.
Today’s data underscore a division in policy outlook between the Federal Reserve, which markets bet will tighten next year, and the Reserve Bank of Australia’s flagged period of stability for its record-low benchmark. Australia is losing its developed-world-beating status as the mining investment boom that powered it through the global financial crisis wanes.
“Stevens was as clear as he is ever likely to be that further rate cuts are not on the agenda,” said Michael Blythe, Sydney-based chief economist at Commonwealth Bank of Australia. “A new message being developed by the RBA governor is the emphasis that policy makers have done as much as they can in creating a backdrop that should support economic growth.”
The Australian dollar was unchanged from before the release of GDP data, trading at 92.83 U.S. cents at 3:28 p.m. in Sydney. Traders are pricing in 1 basis point of rate increase over the next 12 months, according to swaps data compiled by Credit Suisse Group AG.
The RBA lowered borrowing costs from late 2011 to August 2013 in part to spur property prices and encourage housing construction that would help soak up some of the unemployment from the end of the mining investment bonanza. While house prices have surged and residential building is picking up, the jobless rate jumped to 6.4 percent in July, exceeding the U.S. level for the first time since 2007.
“It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that,” Stevens told the Committee for Economic Development of Australia function in Adelaide today.
Home loans to investors in the 12 months ended July surged 8.9 percent, the fastest pace since May 2008, according to central bank data. Home prices across Australia’s state and territory capitals recorded the biggest winter gain since 2007, according to the RP Data-Rismark Home Value Index. Prices rose 4.2 percent in the three months through August, it showed.
“In our efforts to stimulate growth in the real economy, we don’t want to foster too much build-up of risk in the financial sector, such that people or financial institutions are overextended,” Stevens said today. “The more prudent approach is to try to avoid, so far as we can, that particular boom-bust cycle.”
Australia’s economy expanded 3.1 percent in the second quarter from a year earlier, today’s GDP report showed. The median forecast of economists was for a 3 percent increase, and they had predicted a 0.4 percent quarterly gain.
Treasurer Joe Hockey said today that there was “real and building momentum in the Australian economy,” though there are “still challenges that need to be met.”
Australia hasn’t recorded two consecutive quarters of economic contraction, the technical requirement for recession, in 23 years. It avoided the Asian financial crisis of 1997-1998 and the 2009 global recession as government stimulus and a mining investment boom to meet Chinese demand powered growth.
Today’s GDP report showed household spending rose 0.5 percent in the second quarter from three months earlier, adding 0.3 percentage point to growth. Non-dwelling construction advanced 2.5 percent last quarter, adding 0.2 point, and dwelling construction gained 2.3 percent, adding 0.1 point. Machinery and equipment dropped 3.4 percent, subtracting 0.2 percentage point.
“If you abstract from all the big moves in net exports and inventories over the last couple of quarters we still have the same old dilemma for the economy: what’s growing outside mining?” said Stephen Walters, JPMorgan Chase & Co.’s Sydney-based chief economist in Australia. “Not much.”
The nation’s currency averaged 99 U.S. cents in the past three years, compared with just over 70 cents in the prior two decades, spurred by the resource-investment boom and near-zero interest rates in the U.S. and Japan. The currency’s strength -- even as prices of iron ore, Australia’s biggest export, have fallen 35 percent this year -- has hurt manufacturing.
The Aussie “remains above most estimates of its fundamental value, particularly given the declines in key commodity prices,” Stevens said yesterday in a statement announcing the central bank board’s decision to leave rates unchanged at 2.5 percent for a 13th month. “It is offering less assistance than would normally be expected in achieving balanced growth in the economy.”
Today’s GDP report showed the terms of trade, or export prices relative to import prices, declined 4.1 percent in the second quarter from three months earlier and 7.9 percent from the same period a year earlier.
Australia’s economy has entered the third stage of its resource boom that began with a jump in commodity prices, was followed by the labor-intensive investment in increased mine capacity, and is now seen in expanding export volumes that require fewer employees. The RBA is now encouraging the rest of the economy to take up the slack.
“Ideally, the non-mining part of the economy would see a further pick-up to grow a bit above trend for a while, having been below trend for a while up to recently,” Stevens said. “We may not be quite there yet, but we are I think slowly building a foundation for better performance.”