Australian economy powers ahead


Latest GDP figures show Australia's economy is growing at 4.2% a year

By Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia -- Australia's economy is growing at 4.2 percent a year, one of the fastest rates in the industrialized world, official figures released Wednesday show.

Among Asia-Pacific advanced economies, only South Korea is doing better, with a forecast 5.7 percent expansion this year.

Australia's growth is being driven by strong consumer spending, a booming housing sector and rising demand for the resources commodities that make up much of the country's exports.

But the central bank is moving to take some of the steam out of the economy by again lifting interest rates,

Two hours before the government released statistics showing gross domestic product grew a robust 0.9 percent in the March quarter, the Reserve Bank of Australia (RBA) raised its benchmark interest rate a quarter of a percentage point to 4.75 percent.

It was the second rise in two months for the cash rate, following a similar lift of a quarter of a percentage point on May 8.

Strong expansion

The bank's move was widely expected by the market because of concerns expressed last month by RBA governor Ian Macfarlane about inflation pressures, and comments he made last week that the bank would lift the cash rate towards a "netural" setting that was neither too stimulatory nor too restrictive.

In a statement Wednesday, Macfarlane again said the Australian economy was expanding strongly and inflation was close to the top of the bank's target range.

SG Australia chief economist Glenn Maguire told CNN Wednesday that in the months ahead he expected the cash rate to go to 5.5 percent, which would be a neutral setting.

Maguire said it was too early for the rate rises to restrict economic activity, with consumers still getting a lift from housing wealth and equities. He said he expected the housing sector to level off over the next 12 to 18 months.

"The RBA just wants to take some heat out of the economy," he said.

But Australia's peak building industry body, the Housing Industry Association, attacked the rate rise, saying it would dampen business and consumer confidence.

'Damaging' to housing


The Australian dollar has risen about 13% against the greenback so far this year

HIA managing director Dr Ron Silberberg said the reliance on interest rates to stop the economy overheating was "damaging" for the housing industry and to businesses involved in manufacturing.

Silberberg said the recent appreciation of the Australian dollar would clearly affect export activity and put downward pressure on inflation.

The Australian currency has gained 13 percent againt the U.S. dollar since the start of the year and touched a 21-month high of 57.70 U.S. cents on Tuesday. It traded late Wednesday at about 57.25.

The latest rate rise to 4.75 percent in Australia means there is now a margin of 3 percentage points over the U.S. federal funds rate, which will likely lead to a further appreciation of the Australian dollar.

Some analysts say a rate of 60 U.S. cents in the short-term is highly likely, with 70 U.S. cents not out of the question.

The Australian dollar hit a record low against the greenback of 47.75 on April 2 last year.

In a commentary on the GDP figures Wednesday, Nomura Australia economists Tom Kenny and Poppy Liatis said the data represented "an extraordinary performance" by the Australian economy in the face of a significant global slowdown.

But they warned that if the current momentum was to continue, business investment would need to increase to offset an expected tailing off in housing investment.