December 3, 2014 / 2:12 AM / 5 years ago

Australian economy slugged by commodity rout, rates under pressure

SYDNEY (Reuters) - Australia’s economic growth unexpectedly slowed last quarter as sliding export prices took a heavy toll on national income, and the outlook is even darker given the rout in global commodity prices of recent weeks.

The Australian dollar AUD=D4 dived to four-year lows at $0.8392 and markets narrowed the odds of another cut in interest rates after gross domestic product (GDP) rose just 0.3 percent in the third quarter.

That was less than half the pace analysts expected, and the smallest increase since early 2013.

Growth for the year held at 2.7 percent, well short of the 3.1 percent forecast by economists, and seemed certain to slow given the gloom hanging over commodity markets - a rude awakening after years of plenty for the resource-rich nation.

“This dynamic is unlikely to change in 2015 as the economy adjusts to structurally lower national income growth,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“It is the nominal and income story that we continue to focus on and they remain the key drivers of confidence, expenditure, and activity.”

As a major commodity exporter Australia benefited hugely from the China-driven boom in prices of the last decade. With many prices now in freefall, it’s squeezing everything from company profits to investment, wages and tax receipts.

Capital expenditure was particularly weak last quarter, slashing 0.6 percentage points from GDP. Sliding engineering investment alone accounted for half of that fall.

The impact was evident in measures of national income, which statisticians use as a benchmark for living standards generally.

Real net national disposable income fell for a second straight quarter, while GDP measured in current dollars, before adjusting for inflation, dropped for the first time since 2009.

That was grim news for the Liberal-National government since nominal growth is what fills their tax coffers.


Treasurer Joe Hockey has already conceded that coming budget deficits will be much larger than first projected and is likely to lay out more dire numbers in his mid-year financial review due this month, half way into Australia’s fiscal year.

Hockey tried to put a brave face on the numbers, telling reporters he was certain growth would accelerate in 2015. Yet he also acknowledged that the government was falling behind in its plans for a renaissance in infrastructure spending.

Indeed, Wednesday’s data showed public investment had dropped for the third quarter in a row to be down 3.6 percent for the year. That was not a good look for party leader Tony Abbott who has claimed the mantle of the “Infrastructure Prime Minister”.

Hockey did welcome the recent fall in the Australian dollar, which would boost resource earnings, and hinted there might be more that the Reserve Bank of Australia (RBA) could do.

Construction workers descend using temporary stairs on a major construction site in central Sydney June 13, 2013. REUTERS/Daniel Munoz

The central bank has kept interest rates at record lows of 2.5 percent for the past 16 months, but has sounded cautious on cutting further in case it inflated a housing bubble.

Financial markets, however, are narrowing the odds on an easing. Interbank futures <0#YIB:> imply a better than 70 percent probability of a rate cut by mid-2015, having shown almost no chance of a move as recently as a month ago.

The RBA’s next policy meeting is not until early February and, so far anyway, investors only see a one-in-five chance of a move that early.

Editing by Eric Meijer

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