GDP growth faster than expected

The Australian economy grew at a fairly strong 0.9% in the June 2007 quarter, exceeding market expectations and adding further fuel to predictions of a possible interest rates rise by the end of the year.

The close-to-1% GDP result almost doubled market predictions of a 0.5% to 0.7% rise.

Andrew Hanlan, a senior Westpac economist, says the figure is official confirmation that the Australian economy is running too fast.

“With growth exceeding potential and evidence of rising inflation pressures, the Reserve Bank will – pending stabilisation in global financial markets and any flow-through of higher market rates to borrowers – need to lift interest rates further,” Hanlan says.

An increase of 0.7% in private business investment and 0.6% increase in household spending were the main contributors to the GDP rise, while the property and business services sector made the single largest contribution to economic growth, with a 0.3% lift.

The Reserve Bank is meeting today to discuss whether to raise interest rates. It is widely expected to leave rates unchanged.

Despite today’s surprising GDP figure, recent comments by RBA governor Glenn Stevens – not to mention common sense – suggests the bank will wait to see what impact, if any, the US sub-prime mortgage woes have on the global economy.

The number of defaults by US homeowners with privately insured mortgages increased by 28% in July, while the number of mortgages more than 60 days late on payments jumped 8.2%, according to Mortgage Insurance Companies of America data, reported by the Australian Financial Review.

So while there is good news for the Australian economy today, there may still be some large economic icebergs to be navigated in the months ahead.