Australia’s Economy Grows 0.1%, Weakest in 8 Years

By Jacob Greber

Dec. 3 (Bloomberg) -- Australia’s economy grew last quarter at the weakest pace in eight years as household spending stalled, increasing pressure on the central bank to add to the biggest round of interest-rate cuts since a recession in 1991.

Gross domestic product rose just 0.1 percent from the second quarter, when it gained a revised 0.4 percent, the Bureau of Statistics said in Sydney today. The median estimate of 22 economists surveyed by Bloomberg was for a 0.2 percent gain. The economy grew 1.9 percent from a year earlier.

The threat of Australia’s first recession in 17 years has prompted central bank Governor Glenn Stevens to slash borrowing costs by three percentage points since early September. Consumers and businesses are reeling from the impact of a 44 percent slump in the benchmark Australian S&P/ASX 200 stock index and the biggest decline in home prices since 1978.

“A recession shouldn’t be discounted by policy makers or the general public,” said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney. “The outlook is more negative than positive.”

Exports and household spending neither added or subtracted to the change in GDP, while an increase in imports detracted 0.4 percentage point from growth in the quarter, today’s report said.

The Australian dollar traded at 64.28 U.S. cents at 12:35 p.m. in Sydney from 64.25 cents before the report was released. The two-year government bond yield was unchanged at 3.14 percent.

Interest Rates

Reserve Bank of Australia Governor Stevens cut borrowing costs to a six-year low of 4.25 percent yesterday and said monetary policy is now “expansionary.”

While Australia has been more resilient than “other advanced economies,” recent evidence indicates “a significant moderation in demand and activity has been occurring,” Stevens said.

Retail sales growth has slumped as turmoil on global financial markets deepens consumer pessimism. Sales have gained an average of 0.1 percent a month this year, according to government trend figures, down from 0.6 percent monthly growth last year.

Mark McInnes, chief executive officer of David Jones Ltd., Australia’s second-biggest department store chain, said last week the outlook for the rest of fiscal 2009 is worse than that experienced by the company in the last recession of 1990 to 1991.

‘Better Placed’

Waning domestic demand is being partially offset by exports of commodities including iron ore and coal that have stoked profits at companies including BHP Billiton Ltd. and pushed unemployment close to the lowest in more than three decades. The jobless rate was 4.3 percent in October.

“Today’s figures show we can’t completely resist the pull of international forces, but we are better placed” than other countries, Treasurer Wayne Swan told reporters in Canberra today. “This will be a long protracted global crisis.” the U.S., U.K., Europe and Japan have all slipped into recessions, he said.

Exports may slow in coming months as the global economic recession deepens. China’s central bank cut its key interest rate by the most in 11 years last week and the government said “forceful” measures were needed to arrest a faster-than- expected economic decline. China is Australia’s largest trading partner.

“The risk of weaker activity over the next 12 months is ever-present,” said Ben Dinte, an associate economist at Macquarie Group Ltd. in Sydney. “Business investment is clearly looking like slowing over coming quarters,” which will erode growth in 2009 and 2010.

Government Action

To buttress the economy, Prime Minister Kevin Rudd said last week he may allow the government’s budget to slip into deficit for the first time since 2002.

The government agreed with state leaders on Nov. 29 to spend A$15.1 billion ($9.7 billion), mainly on health and education, to generate 133,000 jobs. Rudd is also giving A$10.4 billion in cash grants to the elderly, first-home buyers and families, much of which will be paid this month.

Stevens and his board will probably cut the overnight cash rate target by the end of March to 3.5 percent, a rate last seen in the 1960s, according to Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney.

“While skirting dangerously close to a recession, there is considerable stimulus in the pipeline,” Ong added.

The chain price index, a measure of retail prices, climbed 8.8 percent in the third quarter from a year earlier, today’s report showed.

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