Australia's third-quarter growth disappoints as consumers stay frugal

Adam Jeffery | CNBC

Australia's economy put in another subpar performance last quarter as domestic demand disappointed and consumers chose to save rather than spend, although a solid contribution from international trade helped avoid something worse.

Gross domestic product rose 0.6 percent in the third quarter from the previous quarter, when it increased 0.7 percent, the Australian Bureau of Statistics said. That was less than analysts' median forecast of 0.8 percent, with many sectors of the economy showing little or no growth at all.

(Read more: Australia leaves rates steady, warns on Aussie dollar)

If not for a sizable boost to growth from net exports, GDP would have actually contracted in the quarter. Investors reacted by sending the local dollar down half a U.S. cent as the data slightly added to the case for another cut in interest rates.

"It very much confirms the idea of an economy that is running around sub-trend pace and has a number of challenges," said Su-Lin Ong, a senior economist at RBC Capital Markets.

Deciphering the RBA's decision

"It's supportive of a mild easing bias. The Reserve Bank is obviously reluctant to cut further but if you've got sub-trend growth and very well behaved inflation, there's got to still be scope to move if necessary."

The Reserve Bank of Australia has done its part by cutting rates to a record low of 2.5 percent and recent evidence does suggest the stimulus is working, albeit slowly.

Rising house and share prices have fattened household wealth, boosted consumer confidence and revived home building.

The central bank has had less luck with the local dollar, which it is anxious to get lower to relieve competitive pressure on trade-exposed sectors of the economy. It has even hinted at the chance of intervention, though without much enthusiasm.

(Read more: Australia to be 'odd one out' in 2014:Goldman Sachs)

While the local dollar has dropped 4 U.S. cents in the last couple of months, analysts suspect the RBA would prefer to see it at $0.8500 or lower, rather than the current $0.9075.

This aim, however, is very much hostage to the U.S. Federal Reserve and when it might start tapering its stimulus, a sea change that is widely expected to lift the U.S. dollar.

That is a major reason markets still see a one-in-three chance of the RBA cutting rates again in the next few months. Further out, investors have been toying with the timing of the first hike, though not until early 2015.

Where will the Aussie dollar go next?

Consumers not partying

Wednesday's data showed the value of all goods and services produced in Australia was 2.3 percent higher than in the third quarter of 2012. That was well short of the 3.25-3.5 percent pace that economists consider "normal", although the world's 12th-largest economy did again outpace its peers.

Comparable growth was 1.6 percent in the United States, 1.9 percent for Canada and 1.5 percent in the UK. Despite all the talk of recovery in the European Union, its economy shrank 0.4 percent over the year.

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Output for the 12 months to September was worth A$1.54 trillion ($1.4 trillion) in current dollars, or about A$66,619 for each of Australia's 23 million people. That compares with per capita GDP in the United States of $53,211.

Adding most to growth was international trade as export volumes benefited from all the billions spent on resource expansion, while imports declined as some mining projects got closer to completion.

This trend has years to run, with exports of liquefied natural gas in particular not set to truly explode until 2015.

However, consumers were refusing to come to the party. Household consumption added just 0.2 percentage point to growth, while the savings ratio defied all expectations by popping higher to 11.1 percent.

There have been signs of a pick-up in spending in the last few months, but the jury is very much out on whether Australia's remarkable run of 22 years without recession will make it to 23.

(Read more: Aussie stocks could rally 10% next year)

"The economy looks like it's still stuck in first gear," said Michael Blythe, chief economist at Commonwealth Bank of Australia.

"The readings we've seen for the fourth quarter so far actually look quite encouraging, but it's difficult to see (the growth transition) from today's numbers."