Australia economy slows in third

Credit: Reuters/Daniel Munoz

Construction workers descend using temporary stairs on a major construction site in central Sydney June 13, 2013.

The local dollar AUD=D4 shed half a U.S. cent to a four-year low after gross domestic product (GDP) rose just 0.3 percent in the third quarter. That was less than half the pace analysts expected, and the slowest since early 2013.

Growth for the year held steady at 2.7 percent, but was likely to suffer this quarter given the recent rout in global commodity prices.

'It's a very disappointing result,' said Michael Workman, a senior economist at Commonwealth Bank. 'Nominal GDP contracted as falling resource prices hit incomes, and those prices dropped a lot more this quarter, so there's more pain to come.'

'This will encourage the market to fully price in another cut in interest rates, though it's not clear whether 25 basis points would really make that much difference.'

Indeed, investors have already been narrowing the odds of a cut in rates, which have been stuck at a record low of 2.5 percent for 15 months now.

Interbank futures <0#YIB:> imply a better than 70 percent probability of a rate cut by mid-2015, having shown almost no chance of a move as recently as a month ago.

While the Reserve Bank of Australia (RBA) this week reiterated its steady outlook for policy, it also cautioned that a further fall in the local currency would be needed to keep the economy above water.

INCOMES SQUEEZED

The report from the Australian Bureau of Statistics showed the value of all goods and services produced was A$1.6 trillion ($1.3 trillion) in the year to September, or about A$67,600 ($56,784) for each of its 23.5 million people.

Growth was supported by surging resource output as a decade-long boom in mining investment comes on line. As a result, net exports added 0.8 percentage points to GDP in the quarter, and no less than 1.6 percentage points for the year.

However, prices for many of those resources have been on the slide for months now, pressuring company profits, wages and business investment. Capital expenditure was particularly weak last quarter, slashing 0.6 percentage points from GDP. Sliding engineering investment accounted for half of that fall.

The impact was evident in measures of national income, which statisticians use as a benchmark for living standards generally.

Real net national disposable income fell 0.3 percent in the third quarter, a second straight quarter of decline. Likewise, nominal GDP measured in current dollars, before adjusting for inflation, dropped for the first time since 2009.

That was grim news for the Liberal-National government since nominal growth is what drives tax receipts.

Treasurer Joe Hockey has already conceded that coming budget deficits will be much larger than first projected and is likely to lay out more dire numbers in his mid-year financial review due this month.

(Editing by Eric Meijer)

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