Australian economy unexpectedly slows in Q3

A cruise ship docking in the harbour in front of Sydney's iconic Opera House on Nov 25, 2014. Australia's economy grew by a weaker-than-expected 0.3 per cent in the third quarter,  data showed on Dec 3, 2014. -- PHOTO: AFP
A cruise ship docking in the harbour in front of Sydney's iconic Opera House on Nov 25, 2014. Australia's economy grew by a weaker-than-expected 0.3 per cent in the third quarter,  data showed on Dec 3, 2014. -- PHOTO: AFP

SYDNEY (Reuters) - Australia's economy unexpectedly slowed last quarter as sliding prices for the country's resource exports took a heavy toll on incomes, a disappointing result that stoked speculation that interest rates would have to be cut again.

The Australian dollar shed half a U.S. cent to a four-year low after gross domestic product (GDP) rose just 0.3 per cent in the third quarter. That was less than half the pace analysts expected and the slowest since early 2013.

Growth for the year held steady at 2.7 per cent, but was likely to suffer this quarter, given the recent rout in global commodity prices.

"It's a very disappointing result," said Michael Workman, a senior economist at Commonwealth Bank. "Nominal GDP contracted as falling resource prices hit incomes, and those prices dropped a lot more this quarter, so there's more pain to come."

"This will encourage the market to fully price in another cut in interest rates, though it's not clear whether 25 basis points would really make that much difference."

Indeed, investors have already been narrowing the odds of a cut in rates, which have been stuck at a record low of 2.5 percent for 15 months now.

While the Reserve Bank of Australia (RBA) this week reiterated its steady outlook for policy, it also cautioned that a further fall in the local currency would be needed to keep the economy above water.