Markets missing buying opportunity
Business columnist Malcolm Maiden takes a look at the news in this week's business market.
Economic growth moderated last quarter as higher interest rates and the end of tax breaks proved a headwind, though surging export prices look set to re-energise activity as the year progresses.
Gross domestic product (GDP), or the value of all goods and services produced, rose 0.5 per cent in the first quarter, from the previous quarter when it was up a brisk 1.1 per cent.
Growth for the year held steady at 2.7 per cent, making almost 19 straight years of uninterrupted expansion.
Both readings matched expectations and did little to alter the market's view that rates will be on hold for the rest of the year amid worries about the fallout of Europe's debt problems.
"We recorded good, but not great growth in the quarter. The annual pace is healthy given we are in the early stages of an economic recovery," said Craig James, chief equity economist at CommSec. "And while other countries have been attempting to kick-start their economy, Australia has moved into third gear."
Market reaction to the data was muted, with the Australian doller edging up a little as some had feared a softer outcome.
Analysts and policymakers remain confident that growth will accelerate as the year progresses, thanks in large part to a booming resources sector, even as investors fret on the threat to the global economy from the euro zone's debt woes.
Thus while the Reserve Bank of Australia (RBA) left interest rates steady at 4.5 per cent at its June policy meeting on Tuesday, it only committed to not hiking in the "near term."
Many analysts still think rates could hit 5 per cent by year-end, counting on export demand from China and India to more than compensate from weakness in Europe.
Investors, however, seem more concerned that debt problems in the developed world and a possible housing bust in China will act as a drag. Markets are betting rates could stay at 4.5 per cent well into next year and are even pricing in a 15 per cent chance of an emergency cut in July.
Some business leaders have also sounded more cautious, with big miners in particular warning that projects could be cancelled if the Labor government goes ahead with a new tax on profits.
"Commodity prices go up and they go down, it's a boom and bust industry and the government needs to realise that," said Peter Johnston, managing director at Minara Resources.
Growth owed much to government investment in schools, roads and such, which added 0.7 percentage points to GDP.
Household consumption added a more modest 0.3 percentage point to growth, restrained by rising interest rates and as consumers chose to save more than in past recoveries.
Business spending on equipment was soft, but mainly as payback for a tax-induced surge the previous quarter and surveys still point to much stronger investment ahead.
"The positive outcome for the quarter provides tentative signs that a self-sustaining private sector recovery is in prospect," was the take of Treasurer Wayne Swan.
Imports were also a drag on GDP, though that reflected the relative strength of domestic demand compared to much of the rest of the developed world.
Indeed, export earnings are set to surge in coming months as insatiable demand from China and India boosts prices for iron ore and coal, Australia's two biggest exports.
The terms of trade jumped 4.2 per cent in the first quarter and an even bigger gain is expected this quarter. That shows up in higher profits, wages and tax receipts which was why gross national income climbed 1.7 per cent in the first quarter alone.
This boom in the terms of trade is one reason the RBA remains confident that annual growth will accelerate to around 3.25 per cent by the end of this year and approach 4 per cent in 2011.
"Obviously, global uncertainty is high but for now we think the RBA's confidence is justified and Asia will prove resilient to troubles elsewhere," said Su-Lin Ong, a senior economist at RBC Capital Markets.
Reuters
