Australia’s economy grew at the fastest pace in four years last quarter – underpinned by an export bonanza – even as diminishing inflation pressures spurred the central bank to cut interest rates in May. Gross domestic product rose 1.1% from three months earlier, when it gained a revised 0.7%, and beat economists’ estimates for 0.8% increase. From a year earlier, the economy expanded 3.1%, compared with estimates for a 2.8% gain. Expansion was driven by a 4.4% jump in exports, which added 1 percentage point to growth; and a 0.7% increase in household 
spending.
The report is a fillip for Prime Minister Malcolm Turnbull, who’s battling for another term ahead of what’s shaping up to be a hard-fought July election. It’s also a snapshot of Australia’s economy in the rear-view mirror, a period when the iron ore price jumped amid resurgent demand in China and unemployment dropped to a two-and-a-half-year low.
The currency jumped half a US cent and rate-cut bets were pared. The central bank last month ended a one-year policy pause and lowered its benchmark to a record-low 1.75% as the disinflation that’s engulfed much of the developed world arrived Down Under. The economy’s recent strength suggests a follow-up cut is less likely.
“These numbers will validate a bit of caution on the part of the RBA not to ease too aggressively,” said Richard Yetsenga, acting chief economist at Australia & New Zealand Banking Group in Sydney. While the RBA will cut interest rates further, it won’t happen until August, he said.
The local dollar advanced after the report, buying 72.78 US cents at 1:33 pm in Sydney, from 72.44 cents before the data.
Swaps traders were pricing in a 44% chance the central bank will cut its benchmark again by August, compared with 54% at the end of last week. Bonds tumbled, with the three-year yield climbing 4 basis points to 1.68%. The yield has increased 9 basis points since Friday, heading for its biggest weekly advance since mid-April.
Further buttressing the case for a stronger economy came yesterday when central bank data showed business lending rose at the fastest pace in seven years, suggesting policymakers’ efforts to orchestrate a handover to non-mining sources of growth is taking hold. Indeed, demand for corporate loans has steadily gathered pace since mid-2015.
Yesterday’s data saw the economy’s annual expansion approaching its 30-year average of 3.2%. It also showed non-dwelling construction slumped 7.7%, subtracting 0.5 point from growth. The household savings ratio climbed to 8.1% from a revised 7.5% three months earlier. The terms of trade, or export prices relative to import prices, fell 1.9% from the fourth quarter and 11.5% from a year earlier, reflecting commodity prices’ downturn. Australia’s longer-term potential growth rate – or speed limit – is about 2.5%, National Australia Bank estimates. Weaker trends in population growth and investment suggest a resurgence in productivity will be the only way to counter that, according to the lender’s chief economist, Alan Oster.
As the mining boom unwinds, “if nothing else fills the gap, Australia may experience its worst decade of national income growth, and potentially a deterioration in living standards, in nearly half a century,” said Oster, who previously worked at the Organisation for Economic Cooperation and Development, and forecast yesterday’s 1.1% quarterly gain.
Australia is managing a transition away from mining towards industries like tourism and education that have been buoyed by a weaker currency and record-low wage growth, encouraging them to hire.
“Jobs and growth” is the mantra for Turnbull’s election campaign, as he seeks to woo Australian voters with his coalition’s economic plan, which involves stimulus via company tax cuts. His main opponent, Labour leader Bill Shorten, plans more investment in education and health.
Despite yesterday’s data, the government’s not taking anything for granted:
“While the numbers are welcome, we are very conscious of the fragilities that exist in these numbers and our economic plan is designed to address those fragilities,” Treasurer Scott Morrison said at a media briefing in Brisbane following the GDP release. “The most significant of those is the need to boost earnings.”