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Australia's economy expands at slowest pace in almost a decade on housing

Sydney

AUSTRALIA'S economy expanded at the slowest pace in almost a decade as a prolonged housing downturn weighed on consumer spending, underscoring the central bank's decision to lower interest rates.

Gross domestic product (GDP) advanced 0.4 per cent in the first three months of the year from the prior quarter, statistics bureau data showed in Sydney.

The economy grew just 1.8 per cent from a year earlier, the weakest reading since the global financial crisis, as households boosted their savings and cut spending in a classic response to wealth erosion.

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"The data confirm that the economy started 2019 very softly," said Sarah Hunter, head of macroeconomics at BIS Oxford Economics in Sydney. "Consumers continue to be battered by weak income growth, and this was added to by the drag from sharply falling house prices."

The currency was little changed after the GDP release. The report comes a day after the Reserve Bank of Australia (RBA) cut rates for the first time in almost three years to revive consumption that accounts for almost 60 per cent of GDP, and spur economic growth.

Governor Philip Lowe says the easing should encourage hiring and investment and help lower unemployment.

The wild card is the escalating trade war between the United States and China.

The rise in protectionism has prompted Mr Lowe's US counterparts to consider reversing some of last year's tightening.

Federal Reserve chief Jerome Powell signalled overnight an openness to cut if necessary, pledging to closely watch the fallout from disputes between the US and its largest trading partners.

Mr Lowe is expected to ease again this year - with a better than 60 per cent chance of an August cut - to bring the cash rate to a new record-low one per cent.

Such a level, together with an easing of lending restrictions, should help put a floor under tumbling property prices that have prompted consumers to rein in spending.

In Sydney, housing has fallen 15 per cent. Wednesday's report showed government spending and exports were key drivers of the expansion, adding 0.2 percentage point apiece.

Dwelling investment fell 2.5 per cent and home ownership transfer costs slumped 13 per cent amid the property downturn, collectively shaving 0.3 percentage point from economic growth.

The household savings ratio advanced to 2.8 per cent from a revised 2.6 per cent in the final three months of the year.

Australia's economy is on the cusp of 28 years of expansion, a developed world record; but growth drivers are thinning with the end of the mining and property booms.

Government investment in infrastructure has become an important source of growth and hiring and Mr Lowe, in a speech on Tuesday night, encouraged it to keep stoking the economy.

The RBA needs the economy expanding at 3 per cent or more to drive the jobless rate down to 4.5 per cent, the level at which Mr Lowe now believes will stoke consumer prices sufficiently to return inflation to the central bank's 2-3 per cent target.

But outside government spending and high resource prices - reflected in the terms of trade jumping 3.1 per cent in the quarter - the economy looks moribund. BLOOMBERG