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Australia's economic contraction to put interest rates on hold for short period

06-03-2011 09:26 BJT

CANBERRA, June 2 (Xinhua) -- When Australia's economy suffered its biggest quarterly contraction since the recession of the early 1990s, Australian economists on Thursday told Xinhua that Reserve Bank of Australia (RBA) could hold off raising interest rates for a short term.

The Australian Bureau of Statistics (ABS) on Wednesday released the figures showing that national gross domestic product (GDP) fell a steep 1.2 percent in the March quarter, largely as a result of the flood impact on Queensland coal exports.

It is the worst result since the March quarter of 1991, when the economy shrank 1.3 percent.

The most surprising aspect was a 8.7 percent drop in export volumes, the largest quarterly fall in 37 years.

The retreat, caused by floods in Queensland and cyclones that hurt exports in key industries, such as coal mining, has slowed the annual growth by just 1.0 percent, compared to 2.7 percent in the previous year.

According to National Australia Bank chief economist Alan Oster, the poor GDP number could prompt the RBA to hold interest rates at its meeting next Tuesday.

He said in a statement that the financial markets had been warming towards a rate rise in June, given the central bank's recent statement warning on inflation, adding that the latest GDP reading will make it more difficult for the RBA board to acquiesce in a rate rise, despite the enthusiasm to ease inflationary pressure.

Despite the fall in GDP volumes, ABS figures showed that there was an increase of 0.3 percent in real gross national income driven by an increase of 5.8 percent in the terms of trade on the back of stronger commodity prices.

Treasurer Wayne Swan said Australia's economic fundamentals remained some of the best in the developed world, noted that unemployment is low and job creation is strong, adding that Australia's terms of trade are at record levels and a strong pipeline of mining investment is under way.

HSBC chief economist based in Sydney of Australia, Paul Bloxham, agreed with Swan that the economy is strong, saying that despite GDP fell in the quarter, domestic demand was strong, driven by rising consumption, solid growth in business investment and continued modest support from public demand.

"Overall domestic demand rose by 3.1 percent year over year, which is around trend and a good result for an economy affected by significant natural disasters during the quarter, including the Queensland floods and cyclone Yasi," he told Xinhua on Wednesday night.

"Household consumption growth was solid in the first quarter and increased by a strong 3.4 percent over the year.

"Business investment rose due to continued strength in the mining sector, and there is lots more of this to come."

He said GDP fell at its fastest quarterly rate since the early 1990s recession, but that was due to sharp fall in coal exports.

"Coal exports fell 27 percent in volume terms, and all it reflects is a lack of ability to supply coal to the ships waiting off the Queensland coast. It does not reflect weaker demand for coal," he said.

"In fact, coal contract prices have risen due to continued strength in foreign demand. Timely data also show that coal exports bounced back in March.

"We know the RBA will also see things in these terms. In the quarterly official statement we were told that they will be watching domestic demand, not production indicators. And demand looks strong."

"So there is nothing in today's report that would suggest the RBA would back away from its current outlook for rising inflation or the need to lift rates 'at some point' to contain growing inflationary pressures."

He said he expected the next hike to be in July or August and two more hikes by year-end.

Editor:Yang Jie |Source: Xinhua

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