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Wed 4 Sep 2019 09:45 AM

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Australian economy grows at weakest pace since financial crisis

The Australian dollar rose after the report, which wasn't as bad as some traders had feared

Australian economy grows at weakest pace since financial crisis
Reserve Bank’s back-to-back interest-rate cuts that have since helped revive house prices in Sydney and Melbourne.

Australia’s economy expanded at the slowest pace since the worldwide recession as a weak housing sector dragged on growth, highlighting the need for additional stimulus.

Gross domestic product rose 0.5% in the second quarter, matching expectations and the revised result for the previous three months, data from the statistics bureau showed in Sydney Wednesday. The economy grew 1.4% from a year earlier, the weakest pace since the third quarter of 2009.

The expansion was underpinned by government spending on infrastructure and a trade boom as commodity exporters enjoyed a spike in iron ore, Australia’s biggest export. But dwelling investment slumped in the period, underscoring the need for the Reserve Bank’s back-to-back interest-rate cuts that have since helped revive house prices in Sydney and Melbourne.

The Australian dollar rose after the report, which wasn’t as bad as some traders had feared, and followed weak US manufacturing data that lifted the chance of a Federal Reserve rate-cut later this month. The currency bought 67.74 U.S. cents at 2:59 p.m. in Sydney from 67.64 before the release.

Domestic consumption - accounting for three-fifths of GDP - remained subdued in the second quarter, reflecting weak wages and high household debt. That’s as the savings rate slid to 2.3% from a revised 3% as people put less cash aside in order to meet their commitments. Dwelling investment fell 4.4%.

The annual expansion was just half of the economy’s estimated 2.75% speed limit. GDP needs to rise more than that to eat into spare capacity and tighten the labour market, a key goal of the RBA as it tries to lift inflation.

“On the bright side, weakness was not broad-based, as it was in the first quarter. The contraction in private investment was less pronounced and net exports picked up,” said Tamara Mast Henderson, Bloomberg economist.

Wednesday’s report is a snapshot of the economy in the rear view mirror and comes a day after the RBA held rates at a record-low 1% following its June and July cuts. Governor Philip Lowe is trying to drive down unemployment from the current 5.2% toward the 4.5% he estimates will trigger higher wages.

So far, the impact has come mainly through the housing market, with property prices rising the most in almost 2 1/2-years in August. Meanwhile, uncertainty reigns across the world with the U.S.-China confrontation hurting confidence and spurring multinationals to hold off on major investments.

Still, exporters are benefiting from a 17% drop in the Aussie dollar since early last year and miners are enjoying massive windfalls as disruptions in Brazil and record Chinese steel production sent the iron-ore price soaring. The trade gains underpinned the nation’s first current-account surplus since 1975.

Markets expect Lowe to cut rates twice more to 0.5% -- the RBA’s own forecasts for economic growth rising to 2.75% next year are premised on that.

Yet Lowe still hopes that a combination of his earlier cuts and government tax relief, rising house prices, infrastructure and mining investment and a lower currency will carry the economy through. He even said last month “there are signs the economy may have reached a gentle turning point.”

But even if the domestic picture does improve, the global political turmoil is prompting his counterparts across the world to ease policy. Australia is unlikely to be able to escape doing the same.

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