Australia's economy strengthens, but growth challenges remain

Australia's economy was stronger-than-expected in the first quarter of the year as exports and consumer spending boosted growth, data showed Wednesday, reinforcing a decision to keep interest rates on hold after two cuts this year.

The mining-driven economy grew by 0.9 percent in the first three months of 2015, above analysts' expectations of 0.7 percent, to take the annual rate of growth to 2.3 percent, Australian Bureau of Statistics figures showed.

The quarterly growth was an increase from 0.5 percent in the October-December period last year and 0.3 percent in the July-September quarter. But year-on-year growth slowed from 2.5 percent in the last three months of 2014.

"This is a good, solid result," Treasurer Joe Hockey told reporters, adding that the expansion was "broad-based".

"Exports continue to support our economy, growing by five percent, and this is the strongest quarterly result in 15 years... There is growth in areas such as tourism, education and professional services."

The Australian dollar jumped a third of a US cent to 78.06 US cents after the data was released.

The figures came a day after the Reserve Bank of Australia kept interest rates steady at a record-low 2.0 percent after cuts of 50 basis points so far this year.

"It's a good number but it's not a game changer for us or the RBA," JP Morgan economist Tom Kennedy told AFP.

"It's just more evidence that the Australian economy is now relying on net exports but growth is recovering after a very weak 2014. We think this year will be better and we think next year is going to be better again."

Australia's economy is transiting away from mining-led growth after an unprecedented boom in resources investment that has help it avoid a recession for more than two decades.

The mining boom is shifting towards the exports stage, as the figures showed. But the move towards non-resources-led growth has been shaky, with such industries yet to fill the gap left by the China-fuelled mining surge.

Exports added 1.1 percentage points to GDP growth in the first quarter after jumping by five percent. Household spending increased by 0.5 percent to contribute 0.3 percentage points to GDP.

Non-dwelling construction fell the most, dropping by 4.9 percent during the January to March period to subtract 0.4 percentage points from GDP.

- Weak income figures -

Despite the strong headline figures, the income side of the economy remained weak.

Nominal GDP, which is not adjusted for inflation, rose by 0.4 percent for the quarter for an annual rate of 1.2 percent. Real net national disposable income -- a measure of the nation's earnings and which factors in the terms of trade -- lifted by 0.2 percent quarter-on-quarter to be 0.2 percent lower for the year.

The soft figures were a reflection of the weakening terms of trade, a ratio that measures export prices to import prices, as commodity prices plunge and hurt the resources-dependent economy.

The RBA kept the cash rate on hold Tuesday but warned the economy was continuing to grow below-trend and was "likely to be operating with a degree of spare capacity for some time yet". Annual trend growth is estimated to be about three percent.

National Australia Bank chief markets economist Ivan Colhoun said the Reserve Bank was waiting for more data on the economy's possible recovery.

"They are not cutting interest rates anytime soon just as a general matter of course because they would always look at the impact of their last two cuts, unless the economy is very quickly deteriorating which it isn't at this stage," he told AFP.

"This data suggests that it might not be quite as weak as they've been fearing. But they're also not going to change their mind quickly that mining investment is going to be quite weak next year."