Australia avoids recession

Australia's economy rides clear of a recession

The Australian economy bounced back during the first three months of the year, growing three times faster than analysts had expected.

[The GDP figure] shows that our economy roared back in the March quarter, growing faster than any of the major economies of the industrialised world, with very good prospects for the future.

Finance Minister Peter Costello

"The most important aspect of this increase is that it will change the psychology of the economy," said Mark Paterson, chief executive of the Australian Chamber of Commerce.

Australia's gross domestic product (GDP) rose 1.1% during the first quarter, more than making up for a 0.6% contraction seen during the last three months of 2000.

The rise was mainly thanks to keen demand from shoppers who virtually emptied the shelves in both shops and warehouses, enabling manufacturers to resume production to re-stock.

"This was an excellent set of numbers, with the economy overcoming a savage detraction from inventories," said SG Australia chief economist, Glenn Maguire.

"The rebound in economic growth in the March quarter gets the monkey off the back of the Australian economy," said Commonwealth Securities chief economist, Craig James.

Political leg-up

The surprise growth figure eased widespread concerns that Australia was about to dive head first into a recession.

The Australian people have good reasons to cheer

"[The GDP figure] shows that our economy roared back in the March quarter, growing faster than any of the major economies of the industrialised world, with very good prospects for the future," said Finance Minister Peter Costello.

The figure also makes the prospects for Australia's coalition government much brighter, ahead of a general election due later this year.

Following the economic dip late last year, the government's reputation as a capable warden of Australia's economy had been severely dented.

Consumer confidence took a beating, investment slumped, unemployment edged higher and the Australian dollar hit record lows.

But Mr Costello blamed a collapse in house prices, which had been caused by tax changes, and the unwinding of the stimulus from the Sydney Olympics for the economic troubles.

These negative influences were transitory and have now passed, he insisted.

Interest rates

The strong growth seen during the first quarter reduced the chance of another cut in interest rates.

The strong growth gave Mr Howard's government a boost

Earlier this year, the Reserve Bank cut interest rates three times to 5%.

But a few analysts still insisted that there could be further cuts ahead.

The faster than expected growth in the first quarter kept the annual expansion rate at 2.1%, in line with the government's forecast.

But the weak labour market remains, and the current growth rate is not robust enough to prevent unemployment from rising further, argued Commonwealth Bank chief research economist, Michael Blythe.

"Previous rate cut cycles have typically only ended when the unemployment rate has peaked," he said.

The markets

The Australian dollar surged when the growth figure was released, rising by more than half a cent against the US dollar.

We expect the Australian economy to outperform the US economy, equities to outperform bonds this year and the Australian dollar to recover a little.

Simon Doyle
AMP Henderson

But the stock market failed to match the currency's surge because of the dampened hopes of further interest rate cuts.

The S&P/ASX 200 benchmark index of leading shares rose just 1.1 points to 3,423.3.

But for the year, analysts predictions have now changed.

"We expect the Australian economy to outperform the US economy, equities to outperform bonds... and the Australian dollar to recover a little," said AMP Henderson senior economist, Simon Doyle.