Economic boom tipped to have slowed in quarter

Australia's economic growth slowed last quarter as higher borrowing costs and less government stimulus weakened the housing market, while a stronger currency hurt exports, a government report is predicted to show.

Gross domestic product advanced 0.5 per cent from the previous three months, when it grew 1.2 per cent, according to the median of 24 estimates from economists in a Bloomberg News survey.

The Bureau of Statistics releases the report today, six days before the central bank holds its final policy meeting of the year.

The report may show effects from Reserve Bank of Australia rate increases aimed at cooling inflation sparked by a mining-industry expansion that Governor Glenn Stevens said will extend "over a longish horizon".

Tighter monetary policy, less housing aid and a 7.9 per cent gain in the Australian dollar this year have weakened consumer demand and slowed sales abroad.

"Australia hit a soft patch in the third quarter" as the "drivers of growth transition from the public to the private sector against a backdrop of rising interest rates", said Katie Dean, head of Australian macroeconomics at ANZ Banking Group in Melbourne.

Compared with a year earlier, Australia's economy probably expanded 3.4 per cent in the third quarter, after gaining 3.3 per cent from a year earlier in the previous period, the survey of economists showed.

The nation's employers added 106,200 jobs from July through September, the biggest increase in four years. That helped strengthen the local currency 15 per cent against the US dollar in the third quarter, the second-biggest quarterly jump in four decades, according to Bloomberg data.

A stronger currency weighs on export sales, which account for about one-fifth of the country's GDP.

Fortescue Metals, Australia's third-biggest producer of iron ore, this month approved an A$8.75 billion ($11.3 billion) expansion in Western Australia's Pilbara region to almost triple output as demand from steelmakers increases.

It joins Rio Tinto, Vale and BHP Billiton in announcing expansions as prices rise. Producers are seeking to meet demand from steel mills in China, where consumption of the alloy is forecast by Rio Tinto to double by 2020 from 2008 levels.

"On all the indications available, we are living through an event that occurs maybe once or twice in a century," Stevens said in an address to a Committee for Economic Development of Australia event in Melbourne on Monday. "We obviously have to be wary of overheating."

Citing expectations for a "large expansionary shock" from trade, the RBA on November 2 ended a five-month pause in raising interest rates to contain expected faster inflation in 2011. It was the seventh increase in 14 months and the most aggressive round of tightening by a Group of 20 nation.

In a statement after the decision, Stevens said the economy had "relatively modest amounts of spare capacity".

That outlook is shared by the International Monetary Fund, which predicts Australia's economy will accelerate 3.5 per cent next year on China's demand for raw materials and energy.

Australian home-building approvals snapped a six-month decline in October, and the nation's current-account deficit widened in the third quarter, reports released yesterday in Sydney showed.

The number of permits granted to build or renovate houses and apartments surged 9.3 per cent from September, the Bureau of Statistics said in Sydney yesterday. That exceeded the median forecast for a 1.4 per cent gain in a Bloomberg News survey of 20 economists.

A separate report showed the shortfall on goods, services and investment increased to A$7.83 billion from a revised A$5.41 billion in the second quarter as the strengthening currency lowered exports.

Net exports subtracted 0.4 percentage point from growth in the third quarter, the current-account report showed.

The RBA said in a release yesterday that loans provided by Australian banks and finance companies rose 0.1 per cent in October from the previous month. Lending to companies fell 0.8 per cent from September and 3.2 per cent from a year earlier, the central bank said.

A report published on Monday showed business profits fell 1.5 per cent last quarter, as weaker earnings at financial and construction companies led to the first quarterly decline in more than a year.

A November 10 report showed consumer confidence fell to a five-month low.

Australian business confidence fell for a second month in October as conditions deteriorated to the weakest in more than a year on declining profitability for retail and construction companies, according to a private monthly survey released on November 9.

"Public sector investment also likely fell in the quarter as the school building programme has peaked out," said Paul Brennan, an economist at Citigroup in Sydney.

Construction companies benefited from more than A$20 billion in government spending on roads, railways and schools, started last year to help buttress the economy against weaker global growth.

In testimony last week to lawmakers in Canberra, Stevens reiterated the central bank's outlook for growth of about 3.5 per cent in 2011 and 2012.

He added that "it would take only pretty moderate growth in the second half of the year to achieve that forecast for 2010".

- BLOOMBERG