Disappointing Australian economic growth adds to rate cut case

SYDNEY (REUTERS) - Australia's economy posted a second straight quarter of moderate growth as a drop in business investment offset gains in trade and consumer spending at the start of 2013, a disappointing result that only reinforced the case for lower interest rates.

The local dollar slipped after the Australian Bureau of Statistics reported gross domestic product (GDP) rose 0.6 per cent in the first quarter, matching the previous quarter but short of forecasts of 0.8 per cent and below par for a country that hasn't suffered a recession for more than two decades.

"Globally that is pretty good, but for Australia it's not exactly shooting the lights out," said Su-Lin Ong, a senior economist at RBC Capital Markets.

"The theme of sub-trend growth looks like extending for the rest of the year and longer."

A stubbornly high currency is hammering the manufacturing sector, while a lack of confidence haunts consumers and business alike. And it is far from clear how the economy will cope when a long boom in mining investment finally plateaus this year.

"The transition from mining is the big question, and it's just not clear what will step up to drive growth," added Ong.

Which is why the Reserve Bank of Australia (RBA) cut interest rates to a record low of 2.75 per cent in May and said this week it was ready to ease again if needed.

Markets have priced in a cut to 2.5 per cent by October 0#YIB: .

The value of all goods and services produced was 2.5 per cent higher than in the first quarter of 2012.

That was also a little below forecasts, though the world's 12th-largest economy did at least outpace its peers.

Comparable growth in the United States was 1.8 percent. The UK eked out annual growth of 0.6 percent last quarter, while the EU economy contracted by a full percentage point.

Output for the 12 months to March was worth A$1.5 trillion in current dollars, or about A$64,800 ($62,200) for each of Australia's 23 million people. That compares with per capita GDP in the United States of $50,700.

The main growth driver was trade as the country imported less while past spending on mining and liquefied natural gas projects lifted exports, a trend that has years to run.

Net exports, or exports minus imports, added 1.0 percentage points to growth for the biggest contribution in four years.

Consumers also chose to spend a bit more freely, which lifted household consumption 0.6 per cent. But a more cautious attitude was evident in savings, which edged up to a high 10.6 percent of disposable income.

Businesses also cut back spending on plant and machinery, while home building stayed frustratingly flat in the quarter.

Fortunately for the prospects of future rate cuts, there was little sign of inflation in the report, with unit labour costs falling sharply.