Australian GDP contracts for first time since 2011, Aussie dollar sinks

People walk to work in Sydney on September 21, 2016.
William West | AFP | Getty Images

Australia's economy shrank for the first time in over five years last quarter as businesses, consumers and government all cut back on spending, an unexpected blow that will challenge policymakers' optimism for growth.

The local dollar sank about half a cent after the Australian Bureau of Statistics reported gross domestic product (GDP) fell 0.5 percent in the third quarter, from the second when it rose a revised 0.6 percent.

That was the first contraction since early 2011 and only the fourth since the country's last recession in 1991.

The value of all goods and services was 1.8 percent higher than the same quarter last year, pulling back sharply from around 3.1 percent in the second quarter.

Business investment was the biggest drag with miners still unwinding a decade-long spending boom, while home building retreated after a very strong run.

Australia Q3 GDP to be soft: Economist

The contraction was a major embarrassment to the conservative government of Malcolm Turnbull which won an election in July on a promise of delivering growth and jobs.

It was also chastening for the Reserve Bank of Australia (RBA) which has recently been sounding more upbeat on the economic outlook.

The bank conceded growth would slow when it held rates at 1.5 percent this week, but also predicted an eventual pick up.

So far, investors seem to share the RBA's optimism as rate futures imply scant chance of another rate cut in the next few months, though all thought of a hike has also vanished.

"We think this weakness will be short-lived," said ANZ economist Felicity Emmett. "Recent retail sales strength suggests household spending accelerated into this quarter. We also expect housing construction to bounce."

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