Australia economy slams into reverse, hopes to dodge recession

Australia's economy shrank last quarter as businesses, consumers and government all cut back on spending, a shock result that threatens both the first recession in a quarter of a century and the country's vaunted triple-A credit rating.

The 0.5 percent contraction was the largest since 2008 and a major embarrassment to the conservative government of Malcolm Turnbull which won an election in July on a pledge to deliver growth and jobs.

It was also a chastening outcome for the Reserve Bank of Australia (RBA) which has recently been beating the drum of economic optimism for the future.

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

"The economy was hit by a perfect storm," said CommSec chief economist Craig James, pointing to bad weather at home and political uncertainty globally.

"The only way the economy can grow is by Australians spending, investing and employing. Australians didn’t do this in the September quarter."

The Australian Bureau of Statistics reported gross domestic product (GDP) rose 1.8 percent compared to the same quarter last year to reach AUSD1.67 trillion (USD1.24 trillion).

The pace of growth was down sharply from 3.1 percent in the second quarter and the slowest in seven years.

It just outpaced the United States at 1.6 percent and the EU at 1.7 percent, but lagged Britain's 2.3 percent.

The market reacted by knocking the local dollar down half a cent to USD0.7425, while adding modestly to wagers the RBA might be forced to ease again after cuts in August and May.

Interbank futures imply around a 24 percent chance of a cut by mid-2017, up from 14 percent before the GDP news.

LIKELY TO DODGE RECESSION

Analysts warned the slowdown in growth badly undercuts the government's budget forecasts, making it harder to deliver an eventual surplus and aggravating the risk of a cut to Australia's triple A credit rating.

Ratings agency S&P Global has repeatedly cautioned that it might downgrade the country if the promised path to a surplus by 2020 were to slip again.

Treasurer Scott Morrison lays out his mid-year economic review on December 19 and will be hard pressed to placate the agency, risking a downgrade that would increase borrowing costs for banks and mortgage holders.

It was ironic, then, that it was a pullback in government spending that weighed heavily on growth last quarter. Business investment was another drag with miners still unwinding a decade-long spending boom, while home building retreated after a very strong run.

One silver lining was a 4.5 percent jump in the terms of trade as prices for Australia's major commodity exports rebounded following a couple of years of steady decline.

That should be just a taster as prices have surged this quarter. The country's biggest export earner, iron ore, has now doubled since the start of the year.

The RBA's own index of commodity prices jumped 10 percent in November alone, and when measured by spot prices was 61 percent higher on the same month last year.

That should boost export earnings and company profits and help cushion the tax take from record-low growth in wages.

Consumer demand is also showing signs of life, with retail sales boasting a third month of solid growth in October, while tourism is booming.

Chinese visitors alone are pumping over AUSD9 billion annually into a sector that is also a big employer.

Even the farmers are joining in as Australia's wheat crop is set to break all records, making a timely contribution to GDP.

All of which is why most analysts felt Australia would dodge two successive quarters of negative GDP - the technical definition of recession - and extend its remarkable run of 25 years of uninterrupted growth.

"I see this as a one-off because some of the factors which dragged down growth were reversed in the current quarter," said Shane Oliver, chief economist at AMP Capital.

"Housing and public investment will bounce back, retail spending has recently picked up pace and the boom in resource exports will resume."