Australia growth slows to 0.5 percent in second quarter

Why Australia's Q2 GDP isn't sustainable

Australia's economy slowed in the second quarter as exports stayed sluggish but the pace of growth still beat expectations, data showed on Wednesday.

Gross domestic product (GDP) rose 0.5 percent in the June quarter from the quarter before, a tad above Reuters' forecast for a 0.4 percent expansion and following a 1.1 percent gain in the first three months of the year.

On an annual basis, GDP climbed 3.1 percent, beating expectations of a 3 percent increase and after rising 2.9 percent in the first quarter.

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Australian shares rose 0.2 percent to a two-week high on the news while the Australian dollar ticked up 0.1 percent against the greenback, rebounding from Tuesday's eight-day low.

A breakdown of the data showed net exports were the main drag on the economy. Exports contracted by 0.8 percent on quarter, while imports rose by 3.7 percent. Private consumption growth picked up slightly and while business investment growth strengthened, investment in new dwellings expanded at a slower rate.

"The year-on-year number does look good at face value," said David Bassanese, chief economist at BetaShares. "I would point out though there's a pick up in exports late last year - that's unlikely to be sustained going forward in terms of growth rate."

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Analysts say the underlying demand remains "quite soft" as the the country's two-speed economy is still adjusting to a shift away from its once-booming resource sector.

"There is an obvious downside to the end of Australia's mining investment boom. It has been the bedrock of the economy for the last decade, allowing Australia to be one of the developed world's best performers," said Daniel Martin, Asia economist at Capital Economics. "Mining investment will be a drag on the economy for at least the next couple of years."

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The slowing economy will come as no surprise to the Reserve Bank of Australia (RBA), who on Tuesday kept interest rates at a record low of 2.5 percent for a 13th month, and reiterated the need for accommodative monetary policy for the foreseeable future.

There have been wagers that the central bank could cut rates further to support the economy, but governor Glenn Stevens on Wednesday doused the speculation, saying further cuts in interest rates were unlikely as it would be "unwise" considering the robust housing market.

"Domestic income still weak; the real sign of strength has been residential consumption [which] we see being maintained. Our view is the RBA leaves rates on hold with how the housing prices are going at the moment, they don't want to fuel too much there," said Sean Fenton, portfolio manager at Tribeca Investment Partners.