Photographer: Ian Waldie/Bloomberg

Australia’s Economy Slows on Exports Slump as China Woes Bite

Updated on
  • Australian dollar tumbles to six-year low under 70 U.S cents
  • Exports slide 3.3% in biggest subtraction from growth

Australia’s economy expanded last quarter at half the pace forecast -- only propped up by government and household spending -- as a slowdown in key trading partner China weighed on exports.

Gross domestic product advanced 0.2 percent from the first three months of the year, when it rose 0.9 percent, government data showed Wednesday. That compared with the median of 27 estimates for a 0.4 percent gain and was the weakest result since 2013.

Firms in Australia -- an engine room of the decade-long global commodity boom -- plan to cut investment in the next 12 months, betting they can meet demand from heavily indebted households with existing capacity. The report spans a period when Australia cut interest rates for the second time this year to a record-low 2 percent to offset falling commodity prices.

“The composition of growth is a little disappointing with weak spending on plant and equipment and exports falling,” said Andrew Ticehurst, interest-rate strategist at Nomura Holdings Inc. “The currency is helping but there are still a number of appreciable headwinds,” which means growth will remain below trend in the year ahead, he said.

Aussie Slumps

The local dollar dropped below 70 U.S. cents after the report to a six-year low of 69.82 cents before recovering to 70.15 cents at 12:30 p.m. in Sydney. Traders are pricing in about a 50-50 chance of a rate cut in November, though the weakening currency is likely to temper those expectations.

Ticehurst continues to forecast a rate cut in November but said that view is under some pressure due to the fall in the currency. The weaker Aussie “is doing some of the work for the RBA,” he said.

Compared with a year earlier, the economy expanded 2 percent in the second quarter, the report showed, less than economists’ forecast of 2.2 percent.

General government spending rose 2.2 percent in the second quarter, adding 0.4 percentage point to GDP growth, the report showed. Household spending advanced 0.5 percent last quarter, adding 0.3 point to the expansion, it showed. Exports slumped 3.3 percent, subtracting 0.7 percentage point from GDP growth while dwellings fell 1.1 percent, subtracting 0.1 point.

Savings Grow

Reflecting concern about the economic outlook, the nation’s household savings ratio climbed for the first time since December 2013, rising to 8.8 percent from 8.3 percent in the first three months of this year.

Central bank Governor Glenn Stevens noted Tuesday, after leaving rates unchanged for a fourth month, “some further softening in conditions in China and east Asia of late.”

China’s official factory gauge, released the same day, fell to the lowest reading in three years as monetary easing failed to revive growth. Australia’s terms of trade, or export prices relative to import prices, dropped 3.4 percent in the quarter and are down 30 percent from their 2011 peak, reflecting the country’s dependence on China.

“The Australian economy is growing well despite the biggest fall in our terms of trade in more than fifty years,” Treasurer Joe Hockey said in a press conference. “At a time when other commodity based economies like Canada and Brazil are in recession, the Australian economy is continuing to grow.”

The growth recorded in the three months through June means Australia has now gone 24 years without a recession, defined as two consecutive quarters of contraction.

“Most of the available information suggests that moderate expansion in the economy continues,” Stevens said in his statement. “Overall, the economy is likely to be operating with a degree of spare capacity for some time yet.”