Australia's Q2 GDP Expands More Than Expected

Sep 4, 2007 - Australia's second quarter gross domestic product rose 0.9% sequentially on the back of robust business investment, the Australian Bureau of Statistics said Tuesday. The growth topped the expected 0.6% growth despite trailing the 1.6% pace in the first quarter. Annually, the economy expanded 4.3% in the second quarter after climbing 3.8% in the previous quarter.

The bureau said that non-farm GDP increased 1.2% sequentially in the second quarter. In both trend and seasonally adjusted terms, non-farm GDP increased 5.2% from last year, which is the highest year-over-year trend growth since December quarter of 1994.

In seasonally adjusted terms, final consumption expenditure rose 0.5% from the first quarter and advanced 3.4% from last year. The main contributors to the increase in expenditure on GDP were private business investment which rose 4.5% in seasonally adjusted terms. The growth contributed 0.7 percentage points to GDP in the second quarter.

Growth in private business investment was mainly due to a 5.9% increase in new machinery and equipment. New engineering construction rose 6.6% and total intangible fixed assets rose 8.1% from the previous quarter. Dwelling investment fell 0.2% sequentially impacted by a 0.7% fall in new and used dwellings.

Household final consumption expenditure rose 1.0% sequentially contributing 0.3 percentage points to GDP. Among household consumption expenditures, the main contributors to growth were rent & other dwelling services and recreation and cultural expenditure.

However, private non-farm inventories and imports dragged GDP, with negative contributions of 0.5 percentage and 0.3 percentage points respectively in the June quarter.

The report said that total exports of goods and services increased 0.8% from the previous quarter. Exports of goods rose 0.9%, driven by a 21.0% rise in non-monetary gold exports. However, exports of rural goods declined.

Meanwhile, total imports of goods and services rose 1.1% sequentially in the second quarter. Imports of goods climbed 0.5%, mainly due to a 3.0% increase in imports of Capital goods.

In seasonally adjusted terms, net exports detracted 0.2 percentage point, down from the 0.4 percentage points detraction in the previous quarter.

Australia's terms of trade representing the relationship between the prices of exports and imports fell a seasonally adjusted 0.1% in the second quarter, marking the first fall since the December quarter of 2001. An increase in the terms of trade reflects an increase in export prices or a faster rate of export growth than the imports.

Business Services Up

Business services sector rose 2.5% sequentially, led by property and business services, which contributed 0.3 percentage points to growth, while finance and insurance provided 0.2 percentage points.

Agriculture, forestry and fishing fell 8.2% from the previous quarter, contributing a negative 0.2 percentage point to GDP growth.

Mining activity rose 0.3% sequentially in the second quarter, with stronger growth in services to mining offsetting a small fall in the output of mineral products.

Manufacturing recorded a 0.5% increase from the prior quarter, boosted by metal products and Petroleum, coal & chemicals. In contrast, other manufacturing industries textiles, clothing and footwear, food, beverages & tobacco and machinery & equipment slipped in the June quarter.

However, transport and storage increased 1.2%, driven by solid performances from road transport and air & Space, which rose 2.9% and 2.3%, respectively.

Govt. Welcomes Growth

Meanwhile, Treasurer Peter Costello said that growth in the June quarter was remarkable amid a severe downturn in Australia's agricultural production.

Costello said the farm sector of the Australian economy was still suffering "very badly" due to drought.

"So that makes the overall growth even more remarkable that our economy grew as it did, at 4.3%, notwithstanding a very severe drought and a very severe downturn in farm production," Costello said.

Costello also said that the factors such as sub-prime mortgage crisis in the United States and local risks such as the equine influenza outbreak, instability in equity markets and interest markets affected the economy and will continue to have an effect.

But the Treasurer said the surge in investment was adding to the capacity of the economy. The 4.3% growth recorded by Australia was faster than that of any of the G7 countries and demonstrated the effect of a surge in investment, Costello added.

RBA To Announce Policy Decision

The Reserve bank of Australia' board is scheduled to meet on Tuesday for its next policy decision meeting. The decision will be announced on Wednesday morning.

On August 8, the central bank raised its key overnight cash rate target by 25 basis points to a eleven-year high of 6.50%, as a strong economy tilted the risks to inflation to the upside putting pressure on the bank. This was the first hike of the year after a nine-month break.

However, majority of analysts, expect the central bank to leave the interest rates unchanged this time, although there was concern about rising price pressure in recent months.

Australia's annual inflation stood at 2.9% in August after touching 3.0% in the prior month, according to a survey published by TD Securities and the Melbourne Institute on Monday. On a monthly basis, inflation rose 0.5% in August following a 0.6% increase in July.

The market believe that an interest rate increase now will worsen the liquidity crunch in the financial market, which is struggling to come out of the impact of the US subprime crisis.