Australia economic growth slowest in eight years

A woman looks at a storefront advertising discounts in central Sydney June 2, 2008.

SYDNEY (Reuters) - Australia's economy grew at its slowest pace in eight years last quarter as a gathering recession abroad and evaporating equity wealth at home crimped spending by consumers and businesses alike.

Were it not for a change in the weather which boosted the farm sector, the economy would have shrunk last quarter, highlighting how close Australia was to its own recession and underlining why the Reserve Bank of Australia (RBA) has slashed interest rates by 3 percentage points since September.

"The economy looks like it ground to a halt last quarter," said Michael Blythe, chief economist at Commonwealth Bank. "We ended up on the right side of the zero line, but there's not much margin for error from here."

Wednesday's report showed gross domestic product (GDP), or the value of all goods and services produced in Australia, rose a bare 0.1 percent in the third quarter to an inflation-adjusted A$273.3 billion ($176 billion). That was under already subdued forecasts of a 0.2 percent increase and compared to a 0.4 percent rise in the second quarter.

After stripping out an improvement in agriculture thanks to an easing in the country's drought, the non-farm economy actually contracted by 0.3 percent last quarter.

Compared to the third quarter of last year, GDP grew by 1.9 percent, a sharp slowdown from 2.9 percent the previous quarter and over 4.0 percent in the third quarter of 2007.

For a graphic of quarterly GDP changes see:

here

Investors continue to price in more rate cuts from the RBA, which chopped its key cash rate by a bold 100 basis points to 4.25 percent at its monthly policy meeting on Tuesday.

Interbank futures suggest rates could approach 3.0 percent next year, levels not seen since the early 1960s.

DODGING THE BULLET

"The economy just about dodged the bullet last quarter," said Brian Redican, a senior economist at Macquarie. "And that's a pretty good performance compared to other developed economies."

The United States, the eurozone, UK and Japan are already in recession.

"The emphasis remains on policy makers' stimulating consumer demand and the housing market," said Redican. "Fiscal stimulus and rate cuts remain on the agenda."

Household consumption was essentially flat in the third quarter, after a very rare decline the quarter before, as a slump in share prices ate into wealth. Spending on vehicles led the way with a 7.9 drop, followed by eating out and clothing.

In contrast, households spent more on food, alcohol, health, insurance and public transport. Business and government also spent more on engineering and infrastructure projects.

Trade was a drag on growth in the quarter as import volumes outstripped exports. Since then, a slump in commodity prices augurs ill for Australia's resource exports, particularly given slowdowns in its two biggest customers, China and Japan.

The GDP report was also more than a little outdated given how far the global financial and economic crisis had escalated since September.

More recent numbers showed business and consumer confidence took a hammering in October and November as the global mood darkened and share prices tumbled.

A survey out on Wednesday underlined how bad things were in the giant services sector as firms from retailers to property reported record lows for sales, employment and new orders.

"Indications are that the services sector is in for a tough Christmas," said Heather Ridout, chief executive of the Australian Industry Group which ran the survey.

(Editing by Jonathan Standing)