By Lucy Hughes Jones
(Australian Associated Press)
Australia’s economy is growing at its fastest annual rate in more than three years, but that probably won’t be enough to keep the Reserve Bank on the sidelines.
Figures released on Wednesday showed gross domestic product grew by 1.1 per cent in the first quarter – its biggest quarterly rise for four years.
That put the annual growth rate at 3.1 per cent, above the 15-year average and the fastest since the 2012 September quarter.
Economists this week upgraded growth forecasts following a surge in net exports.
“That’s all well and good but ultimately for the RBA, who are staring down the barrel of structurally lower inflation, what they really need is for the domestic demand story to show improvement,” JP Morgan chief economist Sally Auld told AAP.
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 the quarterly report showed broad-based weakness across all the price pressures in the economy, vindicating the Reserve Bank’s decision to cut rates to 1.75 per cent last month.
“That reinforces the idea that what we saw in the first quarter (consumer price index) release wasn’t a rogue outcome,” she said.
Ms Auld expects the central bank to slash rates to a new record low in August, and to keep moving towards one per cent by the second quarter of 2017.
“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.”
HSBC chief economist Paul Bloxham said the strong pick up in March quarter growth was driven by a bounce in exports including resources and services, along with a decent lift in consumer spending and dwelling investment.
“(But) while domestic demand and income growth remain weak, it is likely that wages and inflation will also remain subdued, which, in turn will keep the cash rate low,” he said.
Mr Bloxham has pencilled in one more rate cut in August following the second quarter inflation print, which he expects to be low.
“We expect no further cuts beyond this because we see local inflation being lifted by a further fall in the unemployment rate in 2017, lifting wages,” he said.
HSBC expects the cost of living to also be supported by a lower currency, commodity prices gradually climbing – which should support income growth – and mining investment no longer acting as large drag on growth by 2017.