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Australia's economy capped its 21st consecutive year of expansion in the 12 months to June but celebrations may be short-lived as sinking commodity prices start to hit home.
The nation's gross domestic product (GDP) expanded 0.6 per cent in the June quarter, well down on the blockbuster expansion rate of 1.4 per cent in the three months to March, the Australian Bureau of Statistics reported.
For the year, the economy grew 3.7 per cent, outstripping most of the rich world. The pace, though matching analysts' forecasts, eased from the revised 4.4 per cent clip for the March quarter.
Government spending propelled the economy during the quarter, rising 1.6 per cent, helping to make up a slump in prices of the country's main exports. China's slowing growth has helped spark further falls in the current quarter, and doubts are growing that Australians can sustain their spending once the effects of carbon tax handouts and interest rate cuts wear off.
"The surprising spurt of growth in the March quarter is now over and we are heading back into a soft patch,’’ said AMP senior economist Shane Oliver.
The Aussie dollar slipped on the news. It was trading at $US1.0209 immediately before the data arrived, but fell to $US1.019 before swiftly recovering the lost ground.
Treasurer Wayne Swan, meanwhile, said the government remained committed to deliver a surplus budget for the year to June 30, 2013, despite the lower-than-expected commodity prices.
"While we have budgeted for a decline in our terms of trade, commodity spot prices have fallen more than we anticipated in May. And obviously it would be a further hit to our budget bottom line if these lower prices were sustained," Mr Swan said.
"That will make our budget task harder. But we are absolutely committed to delivering a surplus in 2012-13," he said.
Four interest rate cuts by the Reserve Bank between November and June helped bolster demand in the first half of 2012. Investors saw little immediate reason to alter their view of the timing of the next interest rate cut, rating the prospect of a rate cut next month as about a two-in-three chance.
Those investors, though, bet the RBA will cut rates twice by December as economic headwinds strengthen.
Those wagers, though, may be altered as soon as tomorrow when the ABS releases August labour force figures. A survey of economists by Bloomberg points to the jobless rate rising from 5.2 per cent to 5.3 per cent, with just 5000 new jobs created for the month.
In the statement accompanying yesterday’s rates decision, RBA governor Glenn Stevens noted that the prospects for China, Australia’s biggest trading partner, had dimmed.
Favourable by comparison
Despite slowing in the second quarter, the Australian economy remains in robust health when compared with its international peers.
The US recorded a growth rate of 2.3 per cent in the year to the end of June, Germany grew 1 per cent and French GDP edged 0.3 per cent higher. The UK economy shrank by 0.5 per cent, Spain's fell 1.3 per cent and Italy's contracted by 2.5 per cent.
In our region, Japan's GDP expanded at a 3.5 per cent clip and South Korea grew by 2.4 per cent. China reported a 7.6 per cent expansion, but that was down nearly more than 1 percentage on a year earlier and down three percentage points since 2009.
State by state
Among the states, final demand rose 1.5 per cent in New South Wales in the quarter, on a seasonally adjusted basis.
In Victoria, struggling with the effects of the strong dollar harming its manufacturing base, final demand fell 0.3 per cent in the quarter.
In Queensland, still gathering pace from flooding last year, final demand was up 3.6 per cent, the ABS said. In Western Australia, demand rose 2.1 per cent, while in South Australia, it was 0.5 per cent.
In Tasmania, state final demand fell 0.8 per cent in the quarter.
Contributing to growth
According to the ABS, household consumption and government spending helped support growth in the June quarter.
Government spending contributed 0.3 percentage points to quarterly growth in the June quarter, rising from 0.1 percentage points in the March quarter, the ABS said. Household consumption added the same amount over the period. Net exports also contributed 0.3 percentage points in the quarter, although the boost was half what economists had been tipping prior to this week.
But as National Australia Bank chief economist Alan Oster noted, June-quarter figures might have been stronger still if consumers had been less cautious.
"It’s a touch slower than what we’re thinking, mainly because consumption was a bit lower than what we were expecting," said Mr Oster, who also predicted a contraction in growth over the second half of the year.
Terms of trade, which measures the relative prices of exports to imports, fell 0.6 per cent in the quarter, the ABS said, compared with a 3.8 per cent drop in the March quarter.
"The fact that the terms of trade peaked in the third quarter of 2011, and has fallen further in the third quarter of 2012, means that some degree of protection for the Aussie economy is dissipating," said Credit Suisse director of fixed income research Jarrod Kerr.
Stephen Walters, chief economist at JP Morgan, agreed that the strong growth recorded in the first half of the year was unlikely to be repeated in the second.
"The second half is going to be much more challenging," he said.
"You're not going to get the same sort of growth rate we have had in the first quarter. It's going to be much closer to 2 per cent or even below over the second half."
ANZ Australia economist Ivan Colhoun said falling commodities prices could hurt growth in coming quarter.
"I think next quarter there will be bigger pressures on that with what's happening in the iron ore price," he said.
Mr Colhoun said that was likely to fall more in coming quarters.
"All the things the RBA was talking about yesterday was about future growth," he said. "They're worried about China, about commodity prices, and the Aussie dollar not responding to those effects."
But one encouraging sign from the GDP data was a strong productivity reading.
As policymakers and business leaders talk about boosting worker output, productivity as measured by GDP per hour worked was 2.4 per cent in the year to June 2012, up from -1.0 per cent in the year to June 2011, the ABS said. That makes it the strongest annual result since at least 2004.
BusinessDay with Reuters