Growth in Australia's GDP slows to 0.5pc

Unpopular budget of spending cuts and higher charges saps consumer sentiment

PUBLISHED : Wednesday, 03 September, 2014, 2:35pm
UPDATED : Thursday, 04 September, 2014, 12:35am

Australia's economy slowed in the year's second quarter as cautious consumers curbed spending and the country imported more, though the result was better than many had feared - and still ahead of most of its rich-world peers.

Data showed yesterday that gross domestic product (GDP) rose 0.5 per cent from the first quarter, when it expanded by a surprisingly strong 1.1 per cent.

In some ways, the slowdown was self-inflicted, as heavily criticised government efforts to justify an unpopular budget of spending cuts and higher charges further sapped consumer sentiment and spending.

Household consumption increased by a pedestrian 0.5 per cent, while Australians chose to save a precautionary 9.4 per cent of their disposable income.

Yet growth still topped forecasts of a 0.4 per cent rise, leaving the Australian dollar steady at US$0.9275.

"When we average out the first-half GDP, growth was tracking along at 3 per cent per annum, and that looks good when you benchmark it against all the negatives that were at work through the period," said Michael Blythe, chief economist with the Commonwealth Bank of Australia.

The softening in the economy would be no surprise to the Reserve Bank of Australia (RBA), which recently trimmed its growth forecast for all of this year back to 2.5 per cent.

It assumes the subpar performance will last for months to come as the economy weathers the winding down of a decade-long boom in mining investment. That is a major reason markets expect interest rates to stay at record lows of 2.5 per cent well into next year.

The report on the second quarter from the Australian Bureau of Statistics showed GDP was 3.1 per cent higher than the year before. That was down from first quarter's 3.4 per cent but still brisk by the standards of developed countries.

Dragging on growth was a sharp rebound in imports, mainly of capital goods, while export volumes dipped slightly. More worrying was a steep fall in prices for commodity exports, notably iron ore, which took a heavy toll on miners' incomes.