Australia's economy grows at half expected pace

Australia's economy grows 0.4% in fourth quarter, half the expected pace

March 7 (BusinessDesk) - Australia's economy grew at half the pace expected in the fourth quarter, suggesting the headwinds of a high currency and weak consumer demand are offsetting the positive effects of the resources boom.

Gross domestic product grew 0.4 percent in the final three months of 2011, from a revised 0.8 percent pace in the third quarter, according to the Australian Bureau of Statistics. Economists had expected growth to continue at 0.8 percent in the latest quarter, according to a Reuters survey.

The weaker-than-expected GDP stoked speculation the Reserve Bank will be more inclined to cut its cash rate from 4.25 percent to underpin the economy. It left the rate on hold this week, saying economic growth was close to trend.

"While there is no doubt that the mining boom is underway, there are also a number of headwinds to growth," economists at Westpac said in a note. "Notable are the high Australian dollar, interest rates, consumers' desire to pay down debt, weakness in the housing sector, unwinding of fiscal policy stimulus and global volatility and uncertainty."

The Australian dollar dropped after the figures were released, touching a six-week low US$1.0511 and was recently at US$1.0545. The New Zealand dollar jumped to 77.28 Australian cents from 76.87 cents immediately before the GDP report as released. Australia is the biggest market for New Zealand exports.

Traders are betting Australia's central bank will cut its cash rate by 40 basis points in the next 12 months, according to the Overnight Interest Swap curve. By contrast, the Reserve Bank of New Zealand is seen hiking its official cash rate by 24 basis points.

Australia's GDP report showed home building fell 3.9 percent in the final three months of 2011 while household spending rose a tepid 0.5 percent. Government spending rose 1 percent while accommodation and food services declined 2.2 percent. Business investment fell 1 percent.

House prices in Australia dropped by a record amount last year, hurting earnings for companies including Fletcher Building.

The economy grew 2.3 percent in the fourth quarter from a year earlier, close to expectations.