Australia economy slows in Q3, tougher times ahead

Australia's economy grew at the slowest pace in a year-and-a-half last quarter as government cutbacks offset a burst of business investment, while lower export revenues and a cresting mining boom point to tougher times ahead.

The Australian Bureau of Statistics reported gross domestic product (GDP) rose 0.5 percent in the third quarter, compared to the previous quarter when it grew 0.6 percent. That was in line with forecasts but the smallest rise since early 2011. The value of all goods and services produced was 3.1 percent higher than in the third quarter of last year at an inflation-adjusted A$369.5 billion ($386 billion). That was still a faster pace of growth than any other developed nation, but analysts suspect a further slowdown will be hard to avoid next year.

"The urgency to find a replacement for mining is quite marked," said Brian Redican, a senior economist at Macquarie. "But the cupboard is looking quite bare, with the government getting entrenched on cutting spending, consumers still cautious and companies outside mining unwilling to spend more," he added. "Apart from housing construction, it's difficult to see whether

growth is going to come from." Policy makers are only too aware of safeguarding the

country's enviable record of 21 years without a recession, which is why the Reserve Bank of Australia (RBA) cut interest rates to a record-matching low of 3 percent on Tuesday.

Investors suspect further easing will be needed to offset a profusion of headwinds, from a falling terms of trade to a high local dollar and a penny-pinching government. Critically Australia's seven-year old boom in mining investment is likely to finally peak in 2013 and the rest of the economy is not yet ready to pick up the slack. Retail spending is sluggish, credit growth is the slowest in decades and the housing industry moribund. Abroad, demand for Australia's commodities remains hostage to the slowdown in China, its single-biggest customer, while the U.S. fiscal cliff overshadows sentiment globally. As a result, markets imply a 60 percent probability that the central bank will relax cut again in February and they have rates of 2.5 percent priced in for the middle of next year.

... contd.

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