Australia’s economy expands at the fastest pace in six years

Australia’s economy grew faster than expected last quarter as households ran down savings to finance their spending — shrugging off falling house prices and weak wage growth.

Gross domestic product advanced 0.9% from the first quarter, when it rose an upwardly revised 1.1%, the statistics bureau said in Sydney Wednesday. The economy expanded 3.4% in the three months through June from a year earlier, the fastest pace since the third quarter of 2012.

“The Reserve Bank has been expecting the economy to perform well,” suggesting the data is unlikely to rush the bank into an interest-rate increase, said Paul Dales, chief economist for Australia at Capital Economics. “But the markets may start to reconsider their view that interest rates won’t rise until sometime in 2020.”

The report spans a period when hiring remained solid and unemployment fell, supporting consumption despite households struggling with a heavy debt burden and weak wages. Government spending helped offset softer business investment in the period and the economy enjoyed a prolonged tailwind from revived exports following disruptions.

The Australian dollar climbed, buying 72.13 US cents at 12:28 p.m. in Sydney, compared with 71.89 prior to the release.

The quarterly growth was supported by a 0.7% increase in household spending, adding 0.4%age point to GDP, as the savings ratio dropped to 1% from a downward revised 1.6% in the first three months, the report showed.

“Our big concern is that at some point households will falter in the face of low income growth, falling house prices, tightening credit conditions and rising mortgage rates,” Dales said, adding there’s a risk consumers “may have overextended themselves.”

‘Right direction’

The central bank will welcome the data, having kept the benchmark interest rate at a record-low to help achieve above-average growth. Treasury estimates the economy’s annual speed limit is about 2.75% and expansion above that starts to utilize spare capacity. Such an outcome is a precursor to faster wage gains and higher inflation, a process Governor Philip Lowe acknowledges will only be gradual.

“The Australian economy is moving in the right direction,” Lowe said in Perth Tuesday evening, having earlier kept rates unchanged at 1.5% for a 23rd meeting. “We are seeking to be a source of stability and confidence, as further progress is made towards full employment and having inflation return to around the midpoint of the target range.”

Traders are pricing in little chance of a rate hike before 2020 as international experience suggests that even as economies reach full employment — a level Australia remains shy of — they still struggle to generate higher pay and faster inflation.

Furthermore, Australia is the developed world’s most China-dependent economy and the prospect of a deepening trade war has the potential to reverberate Down Under. Still, today’s data showed exports rose 1.1% in the second quarter, adding 0.2 point to growth.

� L.P