Australia's economy powers ahead in Q2 as consumers keep spending

Sydney

AUSTRALIA'S buoyant economy posted strong growth in the second quarter of the year on the back of increasing exports, consumer and government spending, official data showed on Wednesday.

The economy expanded by 0.9 per cent in the April-June quarter, following 0.7 per cent growth in the first three months of the year, to take the annual rate of growth to 3.4 per cent - the fastest pace since September 2012. The quarterly reading was far above market expectations of 2.8 per cent, and comes after the previous quarter's year-on-year reading of 3.1 per cent. The increase sent the Australian dollar jumping almost half a cent to 72.17 US cents.

"The national accounts for the June quarter highlight the strength and the resilience of the Australian economy, which is in its 27th year of consecutive economic growth," Treasurer Josh Frydenberg told reporters. "The economy is strong, the fundamentals are good and momentum has continued and these are an encouraging set of numbers."

The economy has recorded uneven expansion in recent years as an unprecedented period of mining investment reaches its end, with the Reserve Bank of Australia (RBA) cutting interest rates to a record-low of 1.5 per cent to support growth.

Household spending jumped 0.7 per cent during the quarter to contribute 0.4 percentage points to growth, while net exports added 0.1 per cent. Government expenditure rose 1.0 per cent in the period to continue its stellar growth through the year.

"(Household) consumption continues to hold up pretty well, facilitated by the savings ratio continuing to fall," JP Morgan economist Henry St John told AFP.

The savings ratio was at 1.0 per cent for the quarter, the lowest since December 2007.

The stronger data reinforced expectations that the next move of the RBA would be to lift rather than cut interest rates. But analysts said any hike was not likely in the near term, with wages growth and inflation remaining soft.

"Despite solid growth, the economy is not generating much in the way of wage or price pressures," Commonwealth Bank of Australia senior economist Gareth Aird said in a note. "There is still plenty of slack in the labour market to chew through."

Mr St John cautioned that exports growth was expected to level out in the second half of the year, while the low savings ratio meant consumers would be unable to further draw down on their reserves.

House prices were also falling this year as tighter lending standards discourage local and international investors, while turbulence in the global economy was a downside risk.

"As the RBA had been expecting growth to be strong, these data don't mean a rate hike is around the corner," Capital Economics' chief economist for Australia and New Zealand Paul Dales said. "But the markets may start to reconsider their view that rates won't rise until sometime in 2020." AFP