Demons lurk behind Australia's growth

Australia's unexpected economic growth last quarter, driven by government cash handouts and record interest-rate cuts that fuelled consumer spending, may mask a bleaker picture.

Gross domestic product rose 0.4 per cent from the previous three months, the statistics bureau reported on Wednesday, buoyed by the Government doling out more than A$12 billion ($15.2 billion) to lower-income earners.

Prime Minister Kevin Rudd said that without the payments, the economy would have contracted about 0.2 per cent in the quarter.

Not so positive was a measure of corporate investment, which showed outlays on machinery and equipment tumbled by the most since the economy was last in a recession in 1991. Miners BHP Billiton and Rio Tinto have cut spending, fired workers and closed mines in Australia as the global slump curbs demand for commodities.

"Australia has been lucky so far, but that good fortune appears set to evaporate when examining the underlying data," said Robert Cunneen, senior economist at AMP Capital Investors. "There was an ominous warning sign that business investment is in rapid decline."

Rio Tinto has slashed its global spending by US$5 billion to US$4 billion this year and BHP shut its US$2.2 billion Ravensthorpe nickel mine in Western Australia.

The West Australian state economy, home to a mining boom that helped drive the nation's expansion over the past decade, contracted 2.3 per cent in the first quarter from the previous three months, the first decline since the fourth quarter of 2000, the report showed.

"Despite the positive GDP result, the data provide clear evidence that the global recession is hitting the Australian economy," Treasurer Wayne Swan said.

"The collapse in business investment may threaten Australia for some time to come," he said.

Production in the mining industry fell 1.5 per cent in the first quarter, manufacturing slipped 3.3 per cent and construction dropped 3.3 per cent.

As companies pared spending, imports fell 7 per cent, the GDP report showed.

The fall in imports "suggests that domestic demand remained very weak," said Heather Ridout, chief executive of Australian Industry Group, an organisation representing businesses.

"We still face a long, hard slog to restore our economic health."

Imports of intermediate goods, which include fuel and raw materials, plunged 10.3 per cent in the quarter. Imports of capital goods, including trucks and machinery, slipped 7.1 per cent.

"There is no guarantee that GDP won't fall in future," Rudd said.

"Regrettably the unemployment rate will go up. The global recession is out there and unfolding. Difficulties and obstacles lie ahead."

The jobless rate reached 5.7 per cent in March, the highest level since 2004, before falling to 5.4 per cent in April.

The Government said in last month's Budget unemployment would climb to 8.5 per cent, which would be the worst reading since 1997, as the jobless queue swells to one million within two years.

"When the unemployment rate skyrockets to 8 per cent by early next year or sooner, it will feel like a recession to many," said Annette Beacher, a senior strategist at TD Securities in Sydney.

Reserve Bank of Australia Governor Glenn Stevens, who left the benchmark interest rate unchanged at a 49-year low of 3 per cent this week, noted that factory usage will keep falling as "companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards".

DANGER SIGNS

Australia's economy grew 0.4 per cent in the first three months of this year, meaning the economy has so far avoided a recession. However:

* Manufacturing slipped 3.3 per cent

* Construction dropped 3.3 per cent

* Imports fell 7 per cent

* Unemployment is tipped to hit 8.5 per cent

- BLOOMBERG