Australia posts strongest growth in 2 years, extends recession-free run

SYDNEY (Reuters) - Australia lived up to its “lucky country” nickname on Wednesday, posting the strongest annual economic expansion in nearly two years last quarter and extending a 27-year run of recession-free growth.

Gross domestic product (GDP) rose by 1 percent in the first quarter, from an upwardly revised 0.5 percent in the December quarter, while annual growth jumped to 3.1 percent from the December quarter’s 2.4 percent.

The last time the economy ran that fast was in the second quarter of 2016.

Wednesday's result just beat market forecasts for growth of 0.9 percent in the quarter and 2.8 percent on-year, pushing the local dollar to near a six-week high at $0.7665 AUD=D4.

Booming exports, business investment and government spending drove first quarter growth although the outlook was dimmed by cautious household spending.

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“It was a pretty lacklustre quarter for expenditure. That’s the component of growth to watch going forward,” said Su-lin Ong, Sydney-based senior economist at RBC Capital Markets.

Household consumption - which accounts for around 57 percent of gross domestic product (GDP) - contributed a meager 0.2 percentage point to growth in the quarter.

Real net national disposable income grew 2.5 percent over the year, but the increase per person was under 1 percent.

Household spending on insurance, transport, health care and utilities grew the most while spending on alcoholic drinks, cigarettes and eating out dropped, the data showed.

The savings ratio declined to 2.1 percent from 2.3 percent in December.

Australian consumers are saddled with a mountain of debt at a time when wages are rising at the slowest pace on record and the unemployment rate is still high at around 5.5 percent, so economists see consumer spending as likely to remain tepid.

“We fear that still subdued real income growth and the weakening housing market will mean a lot of the softness in consumption lingers,” said Paul Dales, Sydney-based chief economist at Capital Economics.

House prices, a major element of consumer confidence, have fallen for successive months since late last year as banks tightened their lending standards amid damaging revelations of some of their business practices.

“With a strong rise in inflation still unlikely and the Royal Commission casting a cloud over future lending conditions, the RBA probably won’t raise interest rates this year or for most of next year,” Dales said, referring to an ongoing government-led inquiry on banking misconduct.

Interbank interest rate futures <0#YIB:> are not fully priced for a hike until September 2019.

Reporting by Swati Pandey; Editing by Kim Coghill and Eric Meijer