UPDATE 2-Australia economy slows in Q3, tougher times ahead
(Adds analyst reaction, recasts)
* Economy grows 0.5 pct in Q3, from previous qtr., 3.1 pct on year
* Market expects more rate cuts to shore up future growth
* Mining investment boom cresting, need other growth sources
* Policy makers looking to stimulate consumption, housing
SYDNEY, Dec 5 (Reuters) - Australia's economy grew at the slowest pace in a year-and-a-half last quarter as government cutbacks offset a burst of business investment, while lower export revenues and a cresting mining boom point to tougher times ahead.
The Australian Bureau of Statistics reported gross domestic product (GDP) rose 0.5 percent in the third quarter, compared to the previous quarter when it grew 0.6 percent. That was in line with forecasts but the smallest rise since early 2011.
The value of all goods and services produced was 3.1 percent higher than in the third quarter of last year at an inflation-adjusted A$369.5 billion ($386 billion).
That was still a faster pace of growth than any other developed nation, but analysts suspect a further slowdown will be hard to avoid next year.
"The urgency to find a replacement for mining is quite marked," said Brian Redican, a senior economist at Macquarie.
"But the cupboard is looking quite bare, with the government getting entrenched on cutting spending, consumers still cautious and companies outside mining unwilling to spend more," he added. "Apart from housing construction, it's difficult to see whether growth is going to come from."
Policy makers are only too aware of safeguarding the country's enviable record of 21 years without a recession, which is why the Reserve Bank of Australia (RBA) cut interest rates to a record-matching low of 3 percent on Tuesday.
Investors suspect further easing will be needed to offset a profusion of headwinds, from a falling terms of trade to a high local dollar and a penny-pinching government.
Critically Australia's seven-year old boom in mining investment is likely to finally peak in 2013 and the rest of the economy is not yet ready to pick up the slack.
Retail spending is sluggish, credit growth is the slowest in decades and the housing industry moribund. Abroad, demand for Australia's commodities remains hostage to the slowdown in China, its single-biggest customer, while the U.S. fiscal cliff overshadows sentiment globally.
As a result, markets imply a 60 percent probability that the central bank will relax cut again in February and they have rates of 2.5 percent priced in for the middle of next year <0#YIB:>.
STILL AHEAD, BUT SLIPPING
Wednesday's data did show an economy still outperforming its rich world peers.
Australia's annual growth of 3.1 percent compared with 2.5 percent in the United States and 1.5 percent in Canada. The UK managed just zero growth last quarter, while the EU economy contracted by 0.6 percent.
Output for the 12 months to September was worth A$1.5 trillion in current dollars, or A$64,704 for each of Australia's 22.8 million people. That compares with per capita GDP in the United States of $50,216.
Australia passed Spain as the world's 12th largest economy this year, despite being 52nd in terms of population.
The main growth driver in the third quarter was business spending on engineering and equipment, mostly linked to mining and liquefied natural gas projects.
Yet household consumption grew only marginally, with Australians cutting back on everything from food to energy and clothing.
Public spending fell sharply as the ruling Labor Party tightened the purse strings in an ambitious attempt to get the budget back into surplus years before most other rich nations.
Crucially, lower prices for key exports such as iron ore and coal took a heavy toll on the country's terms of trade, which dropped 4 percent in the quarter and 13.4 percent for the year.
That in turn hit profits, wages and tax receipts, crimping the amount of cash flowing through the economy.
The impact was clear in real net national disposable income, a measure of economic well-being favoured by statisticians, which dropped 0.7 percent in the quarter.
Likewise, annual growth of GDP in current dollars slowed to just 1.9 percent, a far cry from the 8 percent-plus pace enjoyed for much of the past six years.
Fortunately for the prospects of future rate cuts, the data showed scant sign of inflationary pressures in the economy with labour costs falling and productivity improving.
"With the peak in mining capex approaching, the need to stimulate other parts of the economy becomes all the more urgent, requiring even easier monetary policy," said Stephen Walters, chief economist at JPMorgan.
"This is particularly so in the context of the federal government persevering with is surplus fetish and the Australian dollar likely staying high. We expect another rate cut at the next RBA Board meeting in February."
(Reporting by Wayne Cole; Eeiting by Eric Meijer)