Australia | Jun 04 2008
By Chris Shaw
Just when it seemed the economy was slowing and the Reserve Bank of Australia (RBA) was seeing success from its policy of lifting interest rates along came today’s GDP outcome, shich showed an increase for the March quarter of 0.6%, well above market expectations of an increase of 0.2-0.3%.
As Westpac notes this brings year on year GDP growth to 3.6% against estimates of closer to 2.7%, though the data suggest the pace of growth has moderated as the average increase for the last two quarters is 0.65%, down from 1.15% for the previous half.
But the slowdown is not fast enough according to ANZ Bank economist Riki Polygenis, who notes the RBA had estimated non-farm GDP growth of around 1.75% for 2008 and this is now likely to be between 2-2.25%.
Polygenis suggests today’s data show the resilience of the general economy to higher interest rates and petrol prices and the recent financial market instability, as all components of domestic demand came in stronger than had been expected.
Household consumption was up 0.7%, business consumption rose 1.6% and government spending rose 1.4% for the quarter, with domestic demand of 0.9% overall remaining above trend levels.
The data support the bank’s view interest rates have not yet peaked this cycle, as Polygenis expects the RBA will be disappointed by today’s data and take the view more needs to be done to slow the pace of economic activity.
TD Securities senior strategist Joshua Williamson is not as convinced though, pointing out a large increase in defence capital expenditure contributed around 0.3% to the gain, so excluding that the outcome would have been largely as expected.
Williamson suggests the conflicting economic data currently flowing through will do little to ease the volatility in financial markets in the medium-term, while for GDP specifically the tighter conditions mean a slowing in coming months is to be expected.
Assuming the RBA excludes the one-off defence item the March GDP data are unlikely to cause any action with respect to interest rates as there should still be a reaction to the tighter conditions, meaning rates should continue to stay on hold in coming months. Unless inflation becomes a problem, of course.