September 5, 2017 / 5:51 AM / in 2 months

Australia's central bank holds fire as economy on the rebound

SYDNEY (Reuters) - Australia’s economy likely rebounded sharply last quarter as exports and public spending proved surprisingly upbeat, an outcome that would cheer the country’s central bank which left interest rates at record lows on Tuesday.

FILE PHOTO: Pedestrians walk past the Reserve Bank of Australia building in central Sydney, Australia, March 7, 2017. REUTERS/David Gray/File Photo

The Reserve Bank of Australia (RBA) has kept rates at 1.50 percent since last easing in August 2016 as it bets on a pick up in economic growth this year and next.

The flow of data is favouring the bank’s optimism. Figures out Tuesday showed Australia managed to export more goods last quarter even as falling commodity prices widened the country’s current account deficit.

Government spending also ran faster-than-expected in the June quarter as states splashed out on infrastructure, tilting the risks to the upside for growth.

“Exports came in on the higher side, and government spending was also very strong in the quarter,” said Su-Lin Ong, chief economist at RBC Capital Markets.

“The risk to GDP growth is now on the upside. We will get an upward revision to where everyone is on GDP.”

Ong nudged up her forecast for growth in gross domestic product (GDP) to 0.9 percent, from an initial 0.7 percent. Analysts at CBA also predicted growth of 0.9 percent, while Westpac tipped a 1.0 percent increase.

That would be a marked improvement on the first quarter’s pedestrian 0.3 percent pace, and faster than what the United States managed.

Growth for the year was seen edging up to around 2 percent.

The RBA is confident economic activity will reach around 3 percent in coming months.

“The recent data have been consistent with the Bank’s expectation that growth in the Australian economy will gradually pick up over the coming year,” RBA Governor Philip Lowe said in a statement following the bank’s monthly meeting.

“The outlook for non-mining investment has improved recently and reported business conditions are at a high level.”

Most analysts polled by Reuters expect no change until late 2018 as the RBA remains worried about the outlook for consumer spending, which account for around 57 percent of GDP.

ADDING TO GROWTH

Tuesday’s data from the Australian Bureau of Statistics showed the country’s current account deficit widened to A$9.6 billion ($7.66 billion), from A$4.7 billion in the first quarter, mostly due to a pullback in commodity prices.

Australia’s terms of trade, the ratio of export to import prices, duly fell 6 percent in the quarter.

Yet the volume of exports sold rebounded in the quarter to add 0.3 percentage points to GDP growth, when most analysts had expected a small subtraction.

Also helping was a robust rise in government spending, which analysts at Westpac estimated would alone add half a percentage point to growth in the quarter.

The outlook for exports is also upbeat as an acceleration in global factory output and unexpectedly brisk demand from China has recently boosted prices for a range of commodities.

Copper hit its highest in three years this week, while steel prices in China reached levels not seen since 2013 - supporting iron ore in the process.

The RBA index of commodity prices, which mirrors the country’s export mix, climbed 1 percent in August to be up 16.6 percent on the same month last year. All of which is a boon to the country’s hard-pressed miners.

($1 = 1.2531 Australian dollars)

Reporting by Wayne Cole; Editing by Shri Navaratnam

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