Australia's economy expands faster than expected

SYDNEY — Australia's economy strengthened last year supported by consumer and government spending, data showed Wednesday, with the better-than-expected figures raising hopes the resources-dependent nation is emerging out of a recent slump.

Economic growth expanded by 0.6 per cent in October to December to take the annual rate of expansion to a surprise 3 per cent, figures released by the Australian Bureau of Statistics showed.

The figures beat market expectations of fourth-quarter growth of 0.4 per cent for year-on-year growth of 2.5 per cent, and sent the Australian dollar jumping almost half a cent to 72.19 US cents.

"Today's December quarter national accounts show once again that Australia continues to successfully manage the transition from the largest resources investment boom in our history to broader-based growth," Treasurer Scott Morrison told reporters in Canberra.

"We are growing faster than every economy in the group of 7, growing well above the average of countries in the Organisation for Economic Cooperation and Development. We are growing faster than the United States and the United Kingdom, more than twice the pace of comparable resource-based economies like Canada," he said.

The healthy figures were further supported by an upwards revision of the September quarter growth rate from 0.9 per cent to 1.1 per cent, the strongest three-month reading since March 2012.

Household spending contributed 0.4 percentage points to the December quarter growth while public gross fixed capital formation, which includes construction and infrastructure spending, added 0.2 percentage points to gross domestic product (GDP), the data showed.

The gains were offset by a fall in business spending, which weakened the quarterly growth reading by 0.2 percentage points, as investment in the mining sector continued to soften.

Central bank on hold 

The Australian economy has slowed as the country exits an unprecedented mining investment boom that has helped it avoid a recession for 24 years, with the jobless rate hovering around a decade high and wage growth and business investment outside the resources sector both tepid.

The central Reserve Bank of Australia (RBA) has been trimming interest rates since November 2011, with the last cut in May 2015 taking it to a record-low of 2 per cent, as it sought to boost growth in non-mining sectors.

But the labour market showed signs of strengthening in late 2015, while consumers appeared to be more willing to open their wallets amid a booming residential housing sector.

The central bank kept the cash rate on hold on Tuesday, saying it was monitoring the improvement in the jobs market and that there were "reasonable prospects for continued growth in the economy, with inflation close to target".

The latest readings are better than the RBA's forecast of 2.5 per cent for the year to December 2015 and reinforces its stance to stay on the sidelines at this time, economists said.

"The latter half of last year looks a fair bit stronger than was realised at that time," JP Morgan senior economist Ben Jarman said.  "A lot of the most recent strength comes from consumer spending."

"With other things equal, this means that the RBA can have a bit more confidence in the domestic demand side of things. This helps their on-hold stance," he added.

While the headline figures were healthy, the income side of the economy remained weak, with nominal GDP, which is not adjusted for inflation, at 0.4 per cent for the quarter and 2.4 per cent year-on-year.

The terms of trade, a ratio that measures export prices to import prices, fell 3.2 per cent for the fourth quarter to decline 12 per cent on-year, amid weakening commodity prices.

"Income growth is soft. We've got a measure of living standards, and this is the fourth year of decline in that measure," Deutsche Bank economist Phil O'Donaghoe said.

"The cost of having strong employment in an economy like this is that income growth is so weak," he added.

Separately, Australia followed major world powers by lifting sanctions on Iran on Wednesday, after confirmation from the United Nations that Tehran had taken steps required to curb its disputed nuclear programme.

Under changes announced by the Australian government, businesses will no longer need to seek approval for transactions of more than A$20,000 ($14,436) involving entities from Iran.

While Australia has suspended some of the sanctions imposed on Iran autonomously in 2008 because of the Islamic republic's nuclear programme, some non-nuclear sanctions remain in place, the Department of Foreign Affairs and Trade said in a statement.

Sanctions still in force against Iran include restrictions on the transfer of proliferation sensitive goods, the arms and ballistic missiles embargoes and sanctions against some designated persons and entities.

Australia's anti-money laundering watchdog AUSTRAC expects reporting entities to scrutinise all payments that are routed via third-party countries to Iran or North Korea, which is also subject to sanctions due to its nuclear programme.

AUSTRAC says all transactions to those two countries should be considered as "high risk".