Rate cut expected as Australia slows down
Difficult transition follows mining boom
CANBERRA: Australia’s economy expanded more slowly than forecast in the last three months of 2014, fuelling expectations the central bank will further cut interest rates to record lows.
The Australian Bureaus of Statistics said yesterday that growth came in at 0.5% quarter on quarter and 2.5% over the previous year.
That was below analysts’ expectations of 0.7% quarterly growth and 2.6% over the year. However, it beat the revised 0.4% quarterly expansion in the third quarter.
The figures are the latest to highlight Australia’s struggle to transition from an unprecedented mining investment boom, with non-resources industries struggling to fill the gap.
Treasurer Joe Hockey told reporters that “2.5% for the year in the face of the massive transition in the Australian economy is a good outcome. It’s right on track with around about where we were expecting to be”.
He added: “Australia is still performing well by international comparisons. Our economy over the past year has grown faster than the United States, Germany and obviously Japan and other key trading partners such as Hong Kong and Singapore.”
The Reserve Bank of Australia cut interest rates to a new record low of 2.25% in February in a bid to support growth in the non-mining sectors. And while it kept them on hold on Tuesday, it has adopted an easing bias, cautioning that “growth is continuing at a below-trend pace, with domestic demand growth overall quite weak”.
Despite growing talk of another rate cut the Australian dollar rose to 78.31 US cents after the figures were released from 78.15 cents before.
While overall growth was subdued in the fourth quarter, some of the detail was encouraging, said Barclays’ chief economist for Australia Kieran Davies.
“We had the strongest increase in consumer spending in a few years and nonmining business investment looks to be doing a bit better,” he added.
Net exports continued to support growth, expanding 0.7 percentage points for the quarter while consumer spending rose 0.6 percentage points. Business inventories weakened, falling 0.6 percentage points.
The central bank last month cut its growth forecast for this year to 2.25-3.25%, from a November estimate of 2.5-3.5%, as it warned that unemployment was likely to rise.
The jobless rate has steadily risen over the past year, jumping to a 12-year high of 6.4% in January, while consumer and public spending have mostly remained soft.
Economists tipped the central bank to slash the cash rate again by May, pointing to the subdued growth rates and weak consumer and business confidence.
“Going forward, the falling terms of trade will weigh on profits, wages and public revenues and flow through to softer consumer spending, business investment and public demand,” ANZ bank’s co-head of Australian economics Felicity Emmett said.
“Moreover, the drag from the windback in mining investment still has a long way to run and is likely to be much sharper over coming quarters as large-scale LNG projects approach completion.”
JP Morgan economist Tom Kennedy said the data were in line with forecasts of another easing by the Reserve Bank.