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Australia's economy storms ahead to best growth in six years

Key Points
  • Australia's economy grew 3.4 percent year-over-year in the second quarter of 2018, handily beating market forecasts of 2.8 percent. 
  • The growth was fueled by demand for homes and infrastructure, and higher consumer spending as a result of rapid population growth in Australia. 
  • The latest GDP print marks the country's 27th year without a recession.

Australia's economy sped past all expectations last quarter as rapid population growth fueled demand for homes and infrastructure, while bolstering consumer spending in the face of painfully slow wages growth.

The rousing result marked the 27th year without recession, a remarkable feat given an ever-changing procession of prime ministers and one that owes much to China's insatiable appetite for Australia's resource riches.

The drought in Australia 'could actually add to growth': Economist

Wednesday's data from the Australian Bureau of Statistics showed the economy grew 0.9 percent in the June quarter, from the March quarter when it expanded by a rapid 1.1 percent.

Gross domestic product (GDP) was 3.4 percent higher than a year earlier, ahead even of the 2.9 percent growth boasted by the United States.

It was the strongest result in almost six years and handily beat market forecasts of 2.8 percent thanks to upward revisions of previous quarters.

Investors reacted by driving up the local dollar up a quarter of U.S. cent to $0.7215.

"It's a pretty good print for the quarter and with the upward revisions," said Su-Lin Ong, chief economist at RBC Capital Markets.

"The composition is encouraging as well. We've seen pretty decent domestic demand and reasonably broad-based growth."

The ruling Liberal-National coalition will be hoping the news distracts voters from the endless internecine warfare that saw Prime Minister Malcolm Turnbull ousted last month and replaced with former Treasurer Scott Morrison.

This was the fifth change of prime minister in eight years and sent the government crashing in opinion polls. An election is due by May next year but risks are for an earlier vote.

Analysts fear the political dysfunction could take a toll on consumer sentiment, just as spending seemed to be making a comeback. Household consumption had rebounded in the June quarter to add 0.4 percentage points to GDP.

Also adding to growth were net exports, home building and government spending.

Migrants boost population growth

For the whole year to June, GDP amounted to A$1.84 trillion ($1.33 trillion) in current dollars, or about A$74,000 for each of Australia's 25 million residents.

Fueling that performance was annual population growth of 1.6 percent, more than double the developed-world average, as Australia attracted more migrants from China and India.

Flag of Australia on a beach
Getty Images

Having more people has helped offset weakness in productivity that has bedeviled much of the rich world in recent years. That offset was evident in GDP per capita which grew only 1.8 percent in the year to June.

Plenty of headwinds still loom, including a drought that has scorched the Pacific nation's eastern farm belt.

After a decade of feverish expansion, home prices are now falling across the country — a sizable drag on consumer wealth given the housing stock is valued at A$6.9 trillion.

A recent hike in mortgage rates by Westpac stirred fears the other major banks would follow and pile further pressure on the housing market.

So far, policy makers are unperturbed. Speaking in Perth on Tuesday, Reserve Bank of Australia (RBA) Governor Philip Lowe noted the average mortgage rate was still lower than a year ago and urged borrowers to shop around for better deals.

The central bank has kept interest rates at an all-time low of 1.5 percent since mid-2016 and concedes they will have to remain there for some time yet.

Lowe was concerned at developments abroad, notably the Sino-U.S. trade dispute and the rise of protectionism. Two-way trade accounts for 44 percent of Australia's GDP, while China alone takes around a third of the country's exports.