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Exports, higher govt spending boost Australia's Q1 growth

Jump in goods exports helps narrow current account deficit to A$10.5b

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RBA says it's unlikely to tighten policy until unemployment falls towards 5% and inflation is nearer the 2%-3% target range.

Sydney

A BUMPER run of resource exports and higher government spending provided a much-needed fillip to Australia's economy last quarter, supporting views the economy is likely to extend its 26-year run without recession.

Figures from the Australian Bureau of Statistics on Tuesday showed government spending climbed 1.6 per cent in Q1 to an inflation-adjusted A$84.6 billion ($65 billion), lifting potential for growth.

Separate data showed stronger exports and a relatively smaller rise in imports combined to add 0.3 percentage points to gross domestic product last quarter. Analysts had predicted a 0.5 percentage point addition.

The jump in goods exports helped narrow the country's current account deficit to the smallest since early 2017 at A$10.5 billion.

The strong numbers prompted analysts to upgrade their GDP forecasts. Data due on Wednesday is likely to show Australia's A$1.8 trillion expanded 0.9 per cent in the first quarter from a tepid 0.4 per cent in December. The annual pace likely accelerated to a healthy 2.8 per cent, from 2.4 per cent the previous quarter. Economists had earlier expected growth of 0.8 per cent for the quarter and 2.7 per cent for the year.

Australia also left its key interest rate unchanged at a record low on Tuesday after the key unemployment metric edged higher.

Reserve Bank of Australia governor Philip Lowe kept the cash rate at 1.5 per cent, where it has stood since 2016, as expected by all economists. The jobless rate hit 5.6 per cent in April, moving further away from the central bank's estimated level of full employment.

"Financial markets have been affected by political developments in the eurozone, particularly in Italy," he said. "There are also concerns about the direction of international trade policy in the US and economic developments in a few emerging market economies."

The RBA has fashioned itself as an anchor of stability in Australia's economy, making clear it's unlikely to tighten policy until unemployment falls towards 5 per cent and inflation is nearer the midpoint of the bank's 2-3 per cent target range. Traders are pricing in little chance of a rate hike before mid-2019 amid continued weak growth in wages and consumer prices.

While a lower Aussie dollar would support the trade-reliant economy, it would probably need to fall into the 60s for a sustained period to change the calculations of Mr Lowe and his board. The currency has remained in a relatively tight range in recent weeks as commodity prices held up.

Pressure to tighten policy has eased as lending curbs cooled the Sydney and Melbourne property markets - both down around 1 per cent in the past quarter - after years of blockbuster growth. The central bank is also constrained by record-high household debt, which means any rate increase is going to have an outsized impact on consumption.

"Housing credit growth has slowed over the past year, especially to investors," said Mr Lowe. "Supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high.

"While there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline."

Australians are facing even tighter credit conditions, as an ongoing banking inquiry hears of misconduct and mistreatment of customers. Tighter regulatory scrutiny is likely to put a further brake on lending activity. BLOOMBERG

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