Economic growth picks up in June quarter

Prashant Mehra
(Australian Associated Press)

 

Australia’s economic growth has picked up pace as governments and consumers spend more, but soft inflation and wages growth will mean the central bank will continue to hold off on interest rate hikes.

The economy expanded by 0.8 per cent in the June quarter, taking annual growth to 1.8 per cent, the Australian Bureau of Statistics said on Wednesday.

The rate of growth was slightly weaker than expected, with economists forecasting growth of 0.9 per cent in the quarter and 1.9 per cent for the year.

But June quarter’s growth was a step up from a weather affected rate of 0.3 per cent in the March quarter.

Commonwealth Bank chief economist Michael Blythe said it was a solid outcome considering the sizeable impact from Cyclone Debbie early in the quarter.

“We have picked up during the course of the year and I think the RBA will be happy with that sort of trajectory,” he said.

“The annual growth will pick up sharply in the third quarter because we will be dropping out that negative GDP number from the third quarter of last year.”

Household consumption rose 0.7 per cent during the June quarter as spending on food, clothing and furniture increased, though consumers spent less on gas and electricity because of rising prices.

That contributed the equivalent of 0.4 percentage points to the quarterly GDP growth.

Higher government investment added another 0.6 percentage points to quarterly growth, and exports rose 2.7 per cent in the June quarter, adding 0.6 percentage points to growth.

Weaker private sector spending and inventories detracted from the growth rate.

Numbers on the income side of the national accounts were relatively soft, economists said, with wages growing only 0.7 per cent for the quarter, and the household savings rate falling further to 4.6 per cent.

“This speaks to the underlying weakness of real income growth, and is not a sustainable state of affairs given that consumption firepower is likely to be limited further from here,” JP Morgan economist Ben Jarman said.

As a result, the main measure of prices paid by households rose just 1.3 per cent over the year to June.

While economic growth may be picking up, a lack of inflationary pressures and soft earnings measures means the Reserve Bank will hold interest rates until 2018, Mr Blythe said.

“Certainly it will reinforce the idea that there are no more rate cuts coming, but equally it should underline that rate rises are a long way off,” he said.

Reserve Bank Governor Philip Lowe indicated on Tuesday that interest rates will not move for some time, but the cash rate will rise closer to 3.5 per cent as unemployment falls and inflation improves.

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