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Australian economy resilient to global slowdown as GDP beats estimates…again

The Australian economy showed no sign of losing steam in the face of global headwinds as GDP growth maintained a healthy momentum in the fourth quarter of last year. According to the Australian Bureau of Statistics, the economy expanded by 0.6% quarter-on-quarter in the final three months of 2016, beating forecasts of 0.4% growth.

Adding to the upbeat data was an upward revision to the third quarter’s already robust growth rate from 0.9% to 1.1%. This pushed annual growth up to 3.0% in the fourth quarter, one of the highest among advanced economies and confounding expectations that the economy would end the year up 2.5% year-on-year.

Driving growth in the fourth quarter was household spending, which rose by 0.8% over the quarter and contributed 0.4% to the quarterly growth rate. Consumers in Australia are benefiting from record low interest rates and declining fuel prices. Falling unemployment has also boosted consumer confidence, though in January, the unemployment rate unexpectedly ticked up to 6.0%.

Business spending continued to decline as mining investment was cut back due to the slump in iron ore prices. This deducted 0.2% from GDP growth. But despite falling investment in the sector, mining output actually rose over the course of the year and added 0.4% to the growth rate over the year.

In what may be a blow to the Reserve Bank of Australia’s goal to rebalance the economy away from resources, manufacturing failed to gain from the weaker aussie and deducted 0.2% from GDP growth in the 12 months to December. Non-mining exports were mostly led by the financial sector, which matched the mining sector’s contribution to growth.

Meanwhile, exports and imports were both up 0.6% over the quarter, in further evidence that the Australian economy continues to enjoy growing trade even as Chinese growth slows and commodity prices remain depressed.

The Australian dollar was buoyed by the strong data, hitting a high of 0.7244 against the US dollar, before easing to around 0.7220 in mid-European session today. The aussie depreciated by almost 11% versus the greenback in 2015, helping to cushion the economy from the impact of declining commodity prices. But with signs of a recovery in iron ore prices and doubts about further rate cuts by the RBA, the Australian dollar may have bottomed out when it hit a near 7-year low of 0.6826 back in January.

A weaker currency is one of the reasons why the RBA halted its rate cutting cycle at 2%, where they’ve stood since May 2015. The RBA has maintained a more or less a neutral tone since late 2015 on the need for further rate cuts. However, at its March meeting, there was a slight bias for further easing in the Governor’s statement. The central bank had previously said continued low inflation “may provide” scope for easier policy. This was changed to “would provide” in the March statement, indicating that the RBA is getting more concerned about the downside risks to inflation.

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