Economic caution urged amid Aussie budget wary

GMT 22:35 2014 Wednesday ,04 June

Arab Today, arab today Economic caution urged amid Aussie budget wary

Economic caution urged in Australian
Sydney - XINHUA

 With eyes still watering here from an austere 2014 Budget, Australian economists were ambushed, Wednesday, by the national accounts which expanded in the first quarter on the back of stronger-than-expected mining exports.
Australia's GDP (gross domestic product) expanded by 1.1 percent in the first quarter of 2014. Annual growth lifted to a slightly above trend 3.5 percent, up from 2.7 percent in the December quarter, according to government accounts released Wednesday.
While the news has been welcomed, many of Australia's leading economists have urged caution.
Huw McKay, the chief international economist at Westpac bank described the headline print for Q1 as clearly positive, "but the detail is less impressive."
"Domestic demand increased by only 0.3 percent in the quarter and 1.6 percent over the year. In addition to a downturn in mining investment, consumer spending was relatively modest, and public demand was flat," McKay said.
While the Head of investment strategy at AMP Capital, Shane Oliver warned it was too early to "break out the champagne."
According to Oliver, "Growth will not be sustained at this pace for the next few quarters."
However, the unexpected strength of Q1 results has ushered in a change of forecast for JP Morgan, with analyst Stephen Walters predicting the RBA (Reserve bank of Australia) will no longer trim the cash rate in August.
"Indeed, the Period of Stability RBA officials expect now looks likely to last well into 2015," Walters said.
"We have changed the rate call, but have not made material changes to our macro forecasts, which continue to foresee below- potential output growth, rising unemployment, and benign inflation. "
Walters said, Thursday, that the recent developments mean the new base case is that the RBA will be on hold until the second half of 2015.
"In fact, domestic demand weakness is likely to persist into the second half of this year, so the risk of a rate cut this year remains higher than the chance of a hike."
Australia's base of growth, flush in the process of transitioning from a mining investment boom, is expected to have distributed its reliance from resource exports in the forward estimates, while much hope is placed on a weaker Australian dollar stimulating household spending and home-building.
Hum McKay Chief economist at Westpac told Xinhua that exports remain a key growth engine as the mining boom transitions to the output stage.
"A dry summer has seen export volumes jump 4.8 percent in the quarter, adding 1.1 ppts (percentage points) to the first quarter GDP."
Australia's net exports also added 1.4 ppts in Q1 and 2.7 ppts over the full year.
Buoyed by the decade-long, China-driven resources export boom, Australian exports have clearly benefited from the production-side of expanded mining infrastructure, with rail and port facilities in particular, coming on line and softening the slide in commodity prices.
While non-mining investment failed to shoulder its responsibilities in its first year of a transitioning economy, business investment declined by 1.2 percent in the quarter, the glaring weakness centered on the expected downturn in mining investment.
Exporters will now also face stronger headwinds from lower commodity prices, divided demand and the ongoing challenge of the historically resilient Australian dollar.
Consumer confidence is facing similar challenges, having dropped to near-recession levels after the conservative government of Tony Abbott delivered deep and abrupt taxation, taking the razor to welfare and spending programs.
Consumer sentiment collapsed from 99.7 in April to 92.9 in May with the shock and awe of Treasurer Joe Hockey's Federal Budget, still fresh in the collective imagination.
Australia's consumer sentiment was riding high above 110 just six months earlier.
"This retreat in confidence points to the risk of lackluster consumer spending growth in the near-term," McKay told Xinhua.
"The outcome for the quarter was surprisingly subdued given that the Retail Sales survey reported retail up 1.2 per cent.
"In short, this update suggests that households have shown a desire to constrain spending and to maintain their saving rate at a relatively high level, despite slowing income growth."
McKay said Australia's continuing record low interest rates remain a "key tailwind for growth, but the economy remains constrained by a number of headwinds."
"In particular: a tightening of fiscal policy, slowing growth in China, triggering a decline in our terms of trade, a still high currency, and a downturn in mining investment." McKay added.

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