Australia GDP data set stage for rate cut

Australia's economy grew at a slower pace than expected in the fourth quarter as the mining investment boom continued to fade and businesses reined in spending amid low confidence, raising the prospect of another cut in interest rates.

Figures published on Wednesday showed gross domestic product grew 0.5 per cent in the three months to the end of 2014, slightly below consensus estimates of 0.6 per cent. On an annual basis GDP grew 2.5 per cent, which is below long-term trends for an economy that has enjoyed more than two decades of unbroken growth.

"The soft growth outcome reflects falling mining investment, weak public spending and a large subtraction to growth from inventories," said Felicity Emmett, economist at ANZ Bank. "We expect the Reserve Bank of Australia to cut the cash rate by a further 25 basis points in April."

Australia's economy has been recession-free for almost a quarter of a century because of its mining boom, economic reforms and prudent management. But a sharp fall in the prices of its main exports - iron ore, coal and liquefied natural gas - combined with a drop in mining investment is squeezing corporate profits. This has undermined confidence and pushed the jobless rate to a 12-year high of 6.4 per cent.

Australia's terms of trade - a measure of the relative value of exports compared with imports - fell 1.7 per cent in the fourth quarter. They have now decreased by more than a quarter since peaking in late 2011 as the prices of its main exports have slumped alongside moderating Chinese economic growth.

Wednesday's economic data showed a drop in business inventories was a drag on growth in the fourth quarter, pushing GDP down by 0.6 percentage point. Public investment fell 0.9 per cent in the quarter and is down 11.9 per cent year-on-year.

Net exports were the main contributor to growth, boosting GDP by 0.7 percentage point, led by a ramp-up in iron ore exports. Household spending grew by 0.9 per cent in the quarter - the strongest in three years - and the savings rate fell to 9 per cent - the lowest since 2010.

But with mining investment forecast to fall a further 12.5 per cent to A$110bn (US$86bn) in 2015-16, some economists are warning of tough times to come for one of the world's best performing economies.

"Australia's economy picked up by less than expected in the fourth quarter, and worse is likely to be ahead, given that the effects of a significant deterioration in the country's terms of trade are only just beginning to be felt," said Capital Economics. "We expect growth to slow from 2.7 per cent in 2014 to just 1.8 per cent this year."

Canberra is pinning its hopes on the agricultural, construction and services sectors becoming the drivers of growth as the mining industry contracts.

Last month the Reserve bank of Australia cut interest rates to a record low of 2.25 per cent to stimulate growth. On Tuesday it left rates unchanged but signalled it may take further action to aid the transition.  

Joe Hockey, Australian treasurer, played down the weaker-than-expected economic growth, saying Australia expanded faster than the US, Japan or Germany over the past year. He also pointed to a slight dip in the household savings rate, growth in household spending and increased housing investment as positive signs.

"This shows that we are managing a very challenging transition, from the mining construction boom to broader-based growth," said Mr Hockey.

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