Economy slows, but less than expected: Economy roundup

The Australian economy has defied expectations of a dramatic slow-down in the first three months of 2008 to post a GDP growth rate of 0.6% for the March quarter.

The 0.6% quarterly GDP result, although below that achieved during peak boom times in 2006 and 2007, is well above market expectations of a 0.3% rise.

It equates to an annual growth rate of 3.6% seasonally adjusted, a relatively strong result given the numerous interest rate rises the Reserve Bank of Australia imposed before and during the March quarter in an attempt to slow growth.

Even more worryingly for the RBA, real net national disposable income – a key measure of consumer demand in the economy – grew by 1.1% in the March quarter and 4.2% for the year, a figure that will have to come down if the inflation problem is to be resolved.

All components of domestic demand were stronger than expected, with household consumption up by 0.7%, business investment up 1.6% and government spending up 1.4%.

ANZ economist Riki Polygenis says today’s result suggests the RBA will have to lift rates again this year.

“It is now extremely unlikely that the RBA’s forecast of non-farm GDP slowing to 1.75% year-on-year by the end of 2008 will be met,” Polygenis says

“The RBA has repeatedly warned that ‘should demand not slow as expected’ then their policy stance would need to be reviewed. This has now occurred and today’s figures support our view that the cash rate has not yet reached a peak in 2008,” she says.

There were also mixed results in today’s Australian Industry Group-Commonwealth Bank Performance of Services index, which rebounded from last month’s fall to lift 2.4 points in May. However, the fact that the index is at 49.7, below the 50 point line between growth and contraction, shows the services sector is still in decline.

On the markets today, the S&P/ASX200 has defied a weak US lead to be up 0.3% on yesterday’s close to 5592.9, while the Australian dollar is trading at US95.58c – and likely to go higher on today’s GDP result.