Australia’s economy grows strongly in the first quarter, but the outlook looks bumpier

SYDNEY – Australia’s economy grew solidly in the first quarter, shaking off the disruptions related to Omicron and east coast flooding earlier in the year, with cash-strapped consumers continuing to fuel expansion.

The economy grew 0.8% quarter on quarter and 3.3% year on year in the first quarter, the Australian Bureau of Statistics said on Wednesday. Economists had expected GDP growth of 0.6% for the quarter and 3.0% for the year.

Australia, a major exporter of iron ore and energy products, is benefiting from higher commodity prices as a result of the conflict in Ukraine. Still, China’s zero tolerance for COVID-19 cases faces significant headwinds, with well over a third of Australia’s exports destined for ports on China’s east coast.

Strong demand for Australian mining and rural commodities amid supply shortages in other producing countries and global uncertainty helped export prices rise. Mining profits rose 14.7% to A$69 billion ($49.52 billion), reflecting strong commodity prices for coal, LNG and iron ore, the Bureau of Statistics said.

Still, Australia’s prospects for the domestic market appear to be bumpier as rising inflation has prompted the Reserve Bank of Australia to raise interest rates quickly. The RBA announced its first rate hike in over a decade in May and acknowledged that it had underestimated the strength of inflation across the economy.

Inflation rose at its fastest rate in over 20 years in the first quarter, with economists expecting a worsening in the coming quarters.

Home prices have already started to fall amid concerns that the central bank may have to be more aggressive in raising interest rates than most economists expect. Some economists are expecting a 15% decline in the coming cycle, which would hurt confidence.

Financial markets expect the RBA to make several rate hikes by the end of the year, with more to come in 2023.

The new Labor government, which returned to power on May 21 after nine years in opposition, also faces the task of massive budgetary restructuring after generous stimulus was provided to support economic growth through two years of COVID-19 shutdowns to maintain throughout.

Consumer confidence is already falling as the prospect of higher interest rates, rising living costs and falling real wages dampen spending.

Australia’s terms of trade rose 5.9% in the first quarter, with both export and import prices rising sharply, the Bureau of Statistics said.

Household and government spending drove growth, with total consumption contributing 1.4 percentage points to GDP in the first quarter. Household spending rose 1.5% with gains in a number of discretionary categories, ABS said.

Following the easing of COVID-19 restrictions, household spending on transportation services, hotels, cafes and restaurants, and recreation and culture increased, the ABS said.

The household saving rate fell to 11.4% from 13.4% as household spending growth outpaced household income growth, she added.

Imports of goods and services increased by 8.1%, with net exports falling 1.5 percentage points of GDP. Australia’s economy grows strongly in the first quarter, but the outlook looks bumpier

Brian Lowry

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