Strong Australia 1Q GDP Keeps Rate Rise On Radar
By James Glynn
Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--The Australian economy grew faster-than-expected in the first quarter fueled by strong business investment and healthy consumer spending, defying widespread expectations of a sharp slowdown.
The latest data keeps alive the prospect of a further interest rate rise, analysts said.
Soaring fuel prices, high interest rates and a weakening global growth outlook were expected to slug the economy hard in the first three months of 2008, with some economists having forecast a contraction.
But Australia's average measure of gross domestic product instead rose 0.6% in the first quarter of 2008 from the fourth quarter of 2007 and rose 3.6% from the year-earlier period, the Australian Bureau of Statistics said Wednesday.
Economists on average had expected that GDP rose 0.2% on a quarterly basis and rose 2.8% from a year earlier.
The bureau also revised fourth-quarter GDP growth to 0.7%, from 0.6% when it originally issued the data.
Even against the backdrop of the grimmest global financial market turmoil in close to two decades, Australia's A$1 trillion economy expanded in the opening months of the year, turbocharged by a China-fueled mining boom.
"Economic momentum is holding up fairly well and the consumer is still resilient. The risks are squarely biased for a hike," said Prakriti Sofat, economist at HSBC.
Finance Minister Lindsay Tanner said the data still showed a troubling inflation problem that will need to be fought over the long-term.
"While there are signs of a slowing in domestic demand, the data show that inflationary pressures still remain acute. This emphasizes the importance of tackling inflation," he said.
Australia's inflation rate is currently above 4.0%, well outside the RBA's 2%-3% inflation target, and not expected to return to this target band until 2010.
The data increases the risk that demand won't cool off fast enough for the Reserve Bank of Australia, economists said. The RBA raised the cash rate target aggressively in the first quarter, targeting inflation and surging domestic demand.
With a 20% rise in Australia's terms of trade now forecast in 2008, and tax cuts set to flow to incomes from July 1, pressure on the RBA to raise interest rates further is likely to remain.
"The most challenging time for the RBA will be the second half of 2008 when the income effect of the terms of trade surge are most evident, with another round of income tax cuts also adding to disposable income," said Su-Lin Ong, senior economist at RBC Capital Markets.
The RBA raised the cash rate target aggressively between August and March, with independent rate hikes by banks adding to the pain for home loan borrowers. The official cash rate target has stood at 12-year high of 7.25% since March.
Sally Auld, head of research at Australia & New Zealand Banking Group, said the RBA's recent assumption that the nonfarm economy will grow by just 1.75% in 2008 is looking far too pessimistic.
ANZ recently forecast another two interest rates hikes before the end of the year.
The Australian dollar surged by more than half a U.S. cent after the data.
At 0525 GMT, the currency was quoted at US$0.9565, up from US$0.9499 before the data were issued.
The June three-year bond futures contract was down 0.12 at 93.22.
-By James Glynn; Dow Jones Newswires; 612-8235-2955; james.glynn@dowjones.com (Samuel Holmes and Enda Curran also contributed to this article)
(END) Dow Jones Newswires |
