Australia economy slams into reverse, first contraction since 2011

[SYDNEY] Australia's economy shrank for the first time in over five years last quarter as businesses, consumers and government all cut back on spending, an unexpected blow that will challenge policymakers' optimism for growth.

The local dollar sank about half a cent after the Australian Bureau of Statistics reported gross domestic product (GDP) fell 0.5 per cent in the third quarter, from the second when it rose a revised 0.6 per cent.

That was the first contraction since early 2011 and only the fourth since the country's last recession in 1991.

The value of all goods and services was 1.8 per cent higher than the same quarter last year, pulling back sharply from around 3.1 per cent in the second quarter.

Business investment was the biggest drag with miners still unwinding a decade-long spending boom, while home building retreated after a very strong run.

The contraction was a major embarrassment to the conservative government of Malcolm Turnbull which won an election in July on a promise of delivering growth and jobs.

It was also chastening for the Reserve Bank of Australia (RBA) which has recently been sounding more upbeat on the economic outlook.

The bank conceded growth would slow when it held rates at 1.5 per cent this week, but also predicted an eventual pick up.

So far, investors seem to share the RBA's optimism as rate futures imply scant chance of another rate cut in the next few months.

"We think this weakness will be short-lived," said ANZ economist Felicity Emmett.

"Recent retail sales strength suggests household spending accelerated into this quarter. We also expect housing construction to bounce."

REUTERS