Australia's Economic Growth Slows to 0.3% on Spending

By Jacob Greber

Sept. 3 (Bloomberg) -- Australia's economic expansion slowed in the second quarter to the weakest pace in two years as consumers reduced spending, reinforcing the central bank's decision to cut interest rates for the first time since 2001.

Gross domestic product rose 0.3 percent from the first quarter, when it increased a revised 0.7 percent, the Bureau of Statistics said in Sydney today. The median estimate of 23 economists surveyed by Bloomberg News was for a 0.4 percent gain. The economy grew 2.7 percent from a year earlier.

A slump in consumer spending, business confidence and stock market values has given the central bank ``more scope'' to cut borrowing costs, Governor Glenn Stevens said yesterday. The bank, which increased borrowing costs to a 12-year high in March, reduced the benchmark interest rate by a quarter point to 7 percent yesterday and signaled it expects growth to slow further.

``The Reserve Bank's rate hikes earlier this year have increased the risk of the recession we don't have to have,'' said Clifford Bennett, chief economist at Sonray Capital Markets Ltd. in Sydney. ``We're very fortunate that China is strong. Without our export growth, GDP would be negative.''

Australia's dollar dropped to 82.98 U.S. cents at 11:35 a.m. in Sydney from 83.20 cents before the report was released. The local dollar has fallen 14 percent since June 30, the worst performer of the 17 most-active currencies. The two-year government bond yield fell 2 basis points, or 0.02 percentage point, to 5.67 percent.

Job Cuts

Retail sales dropped in June by the most in six years, business confidence tumbled, and companies including Qantas Airways Ltd. and Ford Motor Co. fired workers. Home-building approvals slumped 2.3 percent in July, the fourth decline this year, a report showed yesterday.

The unemployment rate rose to 4.3 percent in July. Qantas, Australia's largest airline, said in July it will fire 1,500 workers, and Fairfax Media Ltd. last week announced plans to cut 550 jobs.

``It is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead,'' Stevens said yesterday.

The central bank forecast last month that the economy will expand 2 percent this year and 2.5 percent in 2009 after growing 4.3 percent in 2007.

Australia's 2.7 percent annual growth rate in the second quarter compares with 2.2 percent in the U.S., 1.4 percent in the U.K. and 1.7 percent in Germany.

`No Doubt'

``We are probably at the top of the interest rate cycle at this point,'' Commonwealth Bank of Australia Chief Executive Officer Ralph Norris told Nine Network television today. ``There is no doubt that the economy is slowing.''

Australia's benchmark S&P/ASX 200 stock market index has slumped 19 percent this year on evidence the global credit squeeze is buffeting companies including Allco Finance Group Ltd. and Centro Properties Group, which last week posted the nation's biggest losses in five years.

Policy makers raised borrowing costs 12 times between May 2002 and March this year, adding 300 basis points to the benchmark rate in a bid to curb consumer prices that surged 4.5 percent in the second quarter of this year.

The bank aims to keep inflation between 2 percent and 3 percent on average.

``Today's GDP report could have a major influence on the Reserve Bank and market thinking,'' Rory Robertson, an economist at Macquarie Group Ltd. in Sydney, said ahead of the report. Slower-than-expected growth would ``force the Reserve Bank towards a half-point cut in October,'' he said.

Interest Rates

Investors see an 81 percent chance policy makers will cut the benchmark rate at their next meeting on Oct. 7, according to a Credit Suisse Group index based on trading in interest-rate swaps.

Slower household spending is being offset by a mining boom, which is forecast by the central bank to increase income from exports by 20 percent this year, stoking profits at companies including BHP Billiton Ltd., the world's largest miner.

Company profits surged 14.3 percent in the second quarter, and Chinese demand for coal and iron ore helped narrow the current account deficit from a record, reports this week showed.

The chain price index, a measure of retail prices, climbed 4 percent in the second quarter from a year earlier, today's report showed.

To contact the reporters for this story: Jacob Greber in Sydney at jgreber@bloomberg.net.