Australia economy gathers pace, but confidence still lags

Sydney: Australia boasted its fastest growth in two years last quarter as exports surged by the most since 1999, though the long-awaited revival may have already been endangered by a government crusade for fiscal rectitude.

The year certainly started well enough, as the economy expanded by 1.1 per cent in the first quarter, up from 0.8 per cent in the last three months of 2013.

That topped already bullish forecasts of 1.0 per cent growth and seemed to sit at odds with the insistence by Tony Abbott's Liberal National government that a tough budget was needed to fix the country's finances.

The ideologically conservative plan contains a mix of tax rises and higher charges for education and health care along with a clampdown on pension and unemployment benefits.

Ironically the budget is not really one of austerity, at least in the near term. Its economic impact is actually very mild this year and next with the true tightening not kicking in until late 2016.

But to justify it Abbott and his Treasurer, Joe Hockey, have resorted to dark warnings of fiscal emergencies and economic disaster, with a chilling effect on the national mood.

Consumer surveys have shown a steep fall in confidence, the froth has come off the property market and retailers complain of suddenly frugal shoppers.

I do think the budget is a negative for growth in Australia, said Tom Kennedy, an economist at JPMorgan.

A key consequence has been confidence has been very soft, we saw that decline sharply in May and we're probably going to see some decline in the next few months also. That should translate to probably softer domestic activity. Most analysts still expect the A$1.6 trillion economy to grow around 3.0 per cent this year, slightly under the long-term trend of 3.25-3.50 per cent.

The budget drama has come just as the economy was finally responding to record low interest rates. The Reserve Bank of Australia (RBA) cut rates to 2.5 per cent back in August and intends to keep them there for some time yet, in part to help offset the strength of the local currency.

The Australian dollar was up at $0.9280 on Wednesday having climbed a third of a cent on the growth data.

The report from the Australian Bureau of Statistics showed gross domestic product (GDP) in the first quarter was 3.5 per cent higher than the year before, a marked pick up from the 2013 trough of 2.1 per cent.

It was also one of the strongest of any developed nation, beating the US at 2.0 per cent, the Eurozone's 0.9 per cent, Germany's 2.5 per cent and even the UK's 3.1 per cent.

Adding most to growth was international trade as the mountains of money spent on mining expansion boosted export volumes by 4.8 per cent, the largest increase since late 1999.

While the long boom in mining investment is on the wane, rising resource production is fuelling the strong growth in shipment volumes.

Much of this output headed for China, where demand for resources has remained strong despite all the talk of a slowdown. Goods exports to China topped A$100 billion in the year to March, up almost a third on the previous 12 months.

As a result, net exports added a whopping 1.4 percentage points to Australia's GDP last quarter, and no less than 2.7 percentage points for the year.

That was just as well since growth elsewhere in the domestic economy was patchy, a feature highlighted by Hockey himself.

'so our miners are exporting their socks off and thank god because it's having a positive impact on our economy, the Treasurer told a news conference. But one swallow doesn't make a summer. Household consumption did continue to grow, but businesses met demand by running down inventories rather than producing more goods. Likewise, home building looked to be finally gathering momentum, yet investment by businesses was still flat overall.

Although consumption, net exports and dwelling will continue to be positive, we feel the negative impact of public spending and business investment will see growth moderating in coming quarters, said Spiros Papadopoulos, a senior economist at National Australia Bank.

Source: gulfnews.com

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