Australia’s GDP rose 1.1pc in March quarter

Australia’s economy grew strongly in the first quarter, trimming expectations of another RBA rate cut.

A ship loads containers at Sydney’s Port Botany. Exports fuelled the increased growth.

The Australian economy is expanding at a much stronger clip than anticipated, with one analyst saying the latest GDP figures put doomsayers firmly in the corner as expectations of another rate cut were trimmed.

Official numbers from the Australian Bureau of Statistics revealed seasonally adjusted GDP growth of 1.1 per cent for the quarter and 3.1 per cent for the 12 months to March 31 on a surge in exports.

This compared favourably to market expectations for a 0.8 per cent gain in the first quarter and a 2.8 per cent year-on-year lift, while also serving as the fastest annual growth in three-and-a-half years.

The Australian dollar jumped on the data, lifting 0.4 of a cent to US72.85c at 12.40pm (AEST).

The quarterly number represents an acceleration in growth from the December quarter’s upwardly revised 0.7 per cent reading, while the annual number ticked up marginally from 2.9 per cent.

The ABS said the quarterly increase was propelled by exports and household final consumption spending, which added 1 and 0.5 percentage points, respectively. These gains were partially offset by weaker public gross fixed capital formation, which shaved 0.4 percentage points from the number.

In trend terms, growth was pegged at 3.2 per cent for the year, driven by a transition from mining investment to production, with mining adding 0.9 percentage points to the number. It led the way among the nation’s most significant sectors, ahead of the finance sector (+0.4 percentage points).

Public administration and safety, retail and construction also contributed to the strong reading, while manufacturing was the major detractor as it wiped off 0.2 percentage points.

CommSec chief economist Craig James said the pessimists on the economy would soon be unable to mount much of a case to talk down the local economy.

“The gloomsters will say the data is wrong, the economy isn’t that strong. Or they will say that the growth is unsustainable or unbalanced or even both. But it is hard to argue with a mountain of evidence,” he said.

Mr James said it could hardly get much better for the Australian economy, given it is growing above-trend with inflation under control.

“What is happening is what is supposed to be happening – mining construction gave us extra production capacity, now that extra capacity is being put to work,” he said.

However JP Morgan chief economist Sally Auld questioned the growth indicators and expects the RBA to cut rates to a new record low in August.

She said domestic final demand, which is the total amount of spending in the economy, only rose by 0.1 per cent in the quarter and 0.9 over the year.

Ms Auld said all price indicators in the quarterly release were very weak, vindicating the Reserve Bank’s decision to cut rates to 1.75 per cent last month.

“The headline GDP numbers are going to continue to be flattered by very strong net exports. Which will mean that GDP looks good, but it’s not the sort of growth that actually generates any inflation for you,” she said.

“It’s not going to get the RBA out of trouble.”

National Australia Bank chief economist Alan Oster tipped the central bank to keep rates on hold until the June quarter inflation figures were released.

“The figures are neutral for the RBA and are consistent with the view that there’s no need to act unless there’s a particularly compelling reason to do so,” Mr Oster said.

“They certainly don’t need to cut rates to fire up the economy.”

The Australian economy has now expanded for 20 straight quarters and the nation has not seen a recession since 1991, the second longest streak in the developed world.

Prime Minister Malcolm Turnbull said the new figures showed strong economic growth but warned Australia cannot be complacent.

“So far so good, but there is plenty of risk out there on the horizon,” he said.

Analysts had been eagerly awaiting the GDP figures amid expectations the Australian economy would slow significantly from last year’s 3 per cent growth rate, with no sign of a cooldown ensuring expectations of an August rate cut were reduced.

Ahead of the data futures markets were pricing in a 49.4 per cent chance of a move in August, but this has since lessened to 43.6 per cent.

The chances of a June cut have been slashed from 10.4 per cent to 6.8 per cent, with most market-watchers expecting the RBA to wait on the next quarterly inflation numbers on July 27 before strongly considering further action.

The Reserve Bank made its first move on the cash rate in a year on May 3, shifting the rate down to a record low 1.75 per cent.

The central bank’s concern around low inflation drove the decision, with the majority of analysts currently tipping at least one more cut before the end of the year.