Is Australia’s ‘Extraordinary’ Growth a One-Off?

Australia’s economy expanded at its fastest pace in over four years in the first quarter, boosted by strong household consumption growth, but economists say they are doubtful the “lucky country” will be able to extend elevated levels of growth in the coming quarters as spending moderates.

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Gross domestic product (GDP) rose 1.3 percent in the first three months of the year, more than double the 0.5 percent increase forecast and a robust 4.3 percent compared with the first quarter of 2011.

Finance Minister Penny Wong called this above expectation growth “extraordinary” on CNBC adding that the country can face the uncertainty coming from Europe given its good economic fundamentals, while Treasurer Wayne Swan told Dow Jones that Australia’s economy is “one of the strongest in the world.”

However, the optimism of the policymakers was not shared by economists. Shane Oliver, Chief Economist at AMP Capital Investors wrote in a note on Wednesday, titled 'Boom Time or Is It?' that “it would be very dangerous to assume that this sort of growth will continue.”

He added that “Data for April and May suggest that retailing, housing related activity, manufacturing and services sectors are continuing to struggle, suggesting a return to softer sub trend growth in the current quarter and beyond.”

Retail sales, for example, which make up around 20 percent of GDP, have already shown signs of cooling, declining for the first time in 10 months in April against a consensus forecast of a modest rise.

Growth in household consumption, which added 0.9 percentage points to GDP in the first quarter, will not be sustained, according to Oliver. He says much of the spending was concentrated in “normally volatile services items” such as healthcare, transport and education, which is unlikely to continue at such high levels in the coming quarters.

Bill Evans, Chief Economist at Westpac agrees the recent “consumption burst” cannot last as sentiment is being hit by the uncertainty surrounding the global economy.

This weakening confidence is one of the reasons for a fall in Australia's housing prices, which contracted 1.4 percent across all capital cities to a six-year low in May, according to data published by research firm RP Data.

"With house prices continuing to contract modestly, and jobs growth likely to falter, this burst of consumer spending is unlikely to be sustained,” Evans said.

Despite the stronger growth numbers, both Evans and Oliver say the rate cut on Tuesday by the Reserve Bank of Australia was justified, and agree that the central bank needs to engage in further monetary easing.

“The test now will be how forward looking the authorities are prepared to be in the face of this spending burst,” Evans said.