Tags: Australia | GDP | Fall | 20 | Years

Australia First-Quarter GDP Logs Biggest Fall in 20 Years

Wednesday, 01 June 2011 07:19 AM

Australia's economy shrank 1.2 percent in the first quarter, its biggest decline in 20 years, after extensive flooding hit coal exports, but a once-in-a-lifetime mining boom is expected to help growth bounce back quickly this year.

Annual growth in gross domestic product (GDP) slowed to a tepid 1.0 percent in the quarter, down sharply from 2.7 percent in the fourth quarter of 2010, data showed on Wednesday.

The results were in line with a Reuters poll on Tuesday after a report showed net exports subtracted a record 2.4 percentage points from growth.

Damage from the flooding and Cyclone Yasi came at a time when rising utility and fuel prices were already crimping household spending and a strong local dollar was taking a toll on trade-exposed industries such as manufacturing and tourism.

Add to that the impact of earthquakes in Japan and New Zealand, the nation's major trading partners, and it was not surprising to see the economy going into reverse gear.

"The economy has hit a temporary pot-hole courtesy of the natural disasters this year," said Besa Deda, chief economist at St George Bank.

"We are looking for the economy to recover as this year progresses, as a rebound in coal exports occurs and we get a boost from construction and the upswing from capex deepens."

Treasurer Wayne Swan said the data was consistent with budget forecasts, adding: "This weakness is likely to be followed by a strong rebound in the June quarter as the economic impacts of the disasters ease and reconstruction picks up."

The data showed the real value of goods and services produced amounted to A$1.3 trillion for the year to March, or A$58,091 for every man, woman and child in the nation of 22.6 million.

The Australian dollar rose nearly half a cent to $1.0737, relieved the contraction was not as dire as some had predicted. However, it remained well below a 29-year peak of $1.1012 set a month ago.

Interbank bill futures <0#YIB:> slipped, but still implied no chance of an interest rate hike in June and just a 50-50 prospect of a quarter point tightening by October.

"I think the RBA are unlikely to raise rates in June, but the bad headline number really hides the strength of the economy. The strength of domestic demand in particular tells me that the RBA needs to slow demand down," said Matthew Johnson, senior economist at UBS.


The RBA has already said it would look past the weather-induced slowdown in growth when setting monetary policy, believing the effects will be temporary.

Indeed, coal exports showed signs of recovering in March, helping push the nation's trade balance back into surplus. Analysts polled by Reuters expect data on Thursday will show the surplus growing to A$2.0 billion in April from A$1.74 billion as the recovery continues.

Solid demand from China and other parts of Asia has led to huge price increases for coal and iron ore — Australia's two biggest exports — helping lift the country's terms of trade to the highest in over a century.

Wednesday's data showed the terms of trade, or the ratio of export to import prices, rose a further 5.8 percent in the first quarter to be a huge 22.4 percent higher for the year. This is set to increase in the second quarter to a fresh record high.

According to the RBA, Australian miners have received higher contract prices for the June quarter with iron ore contract prices estimated to have been set 23 percent higher than the March quarter and coking coal contracts 45 percent higher.

That in turn is fuelling a massive expansion in mining investment, which should support growth for years to come. Data last week showed mining firms plan to spend A$51.3 billion for the year to June and a record A$83.3 billion for 2011/12 — 6.4 percent of Australia's A$1.3 trillion in GDP.

Mining investment is already more than double the historic average at 4 percent of Australia's GDP, and the RBA now sees that rising to over 6 percent by 2012/13.

This investment boom is already straining the supply of skilled labor. The economy is close to full employment with a jobless rate at just 4.9 percent, a situation the RBA is closely watching.

The RBA expects the economy will expand at a rapid 4.25 percent for all of 2011 and grow around 3.75 percent annually for the next two years. It said a few weeks ago that rates will have to go up to keep a lid on inflation.

"We are still picking two more RBA hikes this year, one in June or July and the second in September," said Joaquin Vespignani, economist at Barclays Capital.

© 2019 Thomson/Reuters. All rights reserved.

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Australia's economy shrank 1.2 percent in the first quarter,its biggest decline in 20 years, after extensive flooding hit coal exports, but a once-in-a-lifetime mining boom is expected to help growth bounce back quickly this year. Annual growth in gross domestic product...
Wednesday, 01 June 2011 07:19 AM
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