Australia's economy records biggest contraction in 20 years

Australia's economy recorded its biggest contraction in 20 years in the first quarter, as floods and cyclones disrupted mining activity and damaged crops.

Gross domestic product shrank 1.2 per cent in the three months ended March 31, after a revised 0.8 per cent expansion in the quarter ended Dec. 31, according to the Australian Bureau of Statistics. The contraction was wider than the 1.1 per cent pace forecast in a Reuters survey and marked the worst out-turn since 1991, when the economy was in recession. Annual GDP rose 1 per cent.

The Australian dollar climbed about half a US cent after the GDP report was published, to recently trade at $1.0727 from $1.0676 immediately prior to the release. The currency has advanced 27% against the greenback in the past 12 months, helped by demand for the nation's raw materials from China and interest rates high enough to attract offshore buyers.

The New Zealand dollar tumbled to 76.49 Australian cents from 77.13 cents immediately before the GDP report showed the nation's biggest export market is in a weaker economic state than was expected.

Today's data probably won't be enough to see the Reserve Bank soften its rhetoric on the need for higher interest rates, some economists said.

"Since the Reserve Bank sharply raised the hawkishness of its rhetoric on May 6 the flow of data has been weak," said Bill Evans, chief economist at Westpac Banking Corp. While it will be difficult "from a public relations perspective" to deliver an interest rate increase at its announcement next week, "the RBA is almost certain to maintain the strong hawkish rhetoric."

Reserve Bank of Australia Governor Glenn Stevens is expected to keep the cash rate at 4.75 per cent next week, extending a policy of no change for a sixth straight meeting.

Treasurer Wayne Swan said weakness in the first quarter was probably followed by "a strong rebound" in the current three-month period, partly on the back of efforts to rebuild after the natural disasters.

The GDP report showed exports declined 8.7 per cent in the latest three months, shaving 2.1 percentage points of GDP. Household spending rose 0.6 per cent.