Australia | Jun 07 2006
By Rudi Filapek-Vandyck
Australia’s GDP growth has recovered quite strongly from a sub-2% pace in the year to the March quarter 2005. According to the latest data compiled by the Australian Bureau of Statistics, Australia’s GDP expanded by a stronger-than-expected 0.9% in the March quarter, lifting the annual rate to 3.1%.
A resurgent consumer sector, solid business investments and public demand all delivered a positive contribution during the first three months of calendar 2006. Slower growth in industry production and continued weak dwelling investment were the major restraints
during the period.
Should investors now see this as a sign that interest rates will be going up soon in Australia?
Most economists appear to be of the view that the surprisingly strong figure will have the full attention of the Reserve Bank of Australia. However, most of them are of the opinion that the next interest rate hike won’t come too soon as the RBA is likely to wait and see what the exact impact of the May rate hike will be.
ANZ’s team of economists points out the RBA had expected economic growth would pick up to around 3-3¼% gradually over the course of this year. Now that economic growth is already around that level, there seems to be little room left for a further acceleration. ANZ remains of the view we will see another RBA rate hike before the end of calendar 2006.
At Commonwealth Bank, the economists draw two straightforward conclusions: inflation should not run out of hand in the second half and is likely to fall back a little and household balance sheets remain stretched, making the Australian consumer highly sensitive to further interest rate hikes.
CommBank’s conclusion is thus "the risks are still to the high side, [but] there is no obvious need for a rapid follow-up rate rise."
CommBank’s team sees no reason to change the view that interest rates in Australia will remain unchanged for the remainder of 2006. The economists acknowledge, however, that risks remain to the upside, and firmly so.
To TD Waterhouse economist Stephen Koukoulas the witnessed pick up in economic activity has all the hallmarks of sustainability. Koukoulas notes that "household consumption appears to be on a reasonably sound footing, notwithstanding the negative savings ratio which is hanging over the economy like a bad smell".
Koukoulas believes Australia’s GDP growth is now on track to reach 3.75% by year end. This is a growth level that he believes will eat up limited spare resources, push unemployment below 5% and keep inflation at 3% or more.
Koukoulas doesn’t believe this is acceptable to the RBA and therefore 25 basis point hike around August or September is his expectation.