Australia economy beats forecasts to grow at fastest pace in nearly 2 years; Aussie dollar up

A ferry traversing Sydney Harbour.
A ferry traversing Sydney Harbour.PHOTO: AFP

SYDNEY (REUTERS) - Australia's economy outpaced all forecasts to grow at the fastest pace in almost two years last quarter as strength in consumer and government spending offset the heavy drag from a global mining slump.

The upbeat report sent the Aussie dollar half a US cent higher as investors reined back expectations of further cuts in interest rates, while providing a political boost to the coalition government of Malcolm Turnbull.

Gross domestic product (GDP) expanded by 0.6 per cent in the fourth quarter, from the previous quarter when it rose an upwardly revised 1.1 per cent.

That propelled growth for the year to 3 per cent, well above the 2.5 per cent that had been expected by both analysts and the Reserve Bank of Australia (RBA).

"Given Australia is going through the biggest mining pullback in our lifetimes, this is a pretty good outcome," said David de Garis, a senior economist at National Australia Bank. "Our baseline is that the RBA is done cutting rates, and these numbers only support that view."

The central bank has held rates steady since May last year and just this week skipped a chance to ease, saying it saw"reasonable prospects" for growth.

RBA Governor Glenn Stevens did say there would be scope for further easing given that inflation looked set to remain low, and investors are still wagering he will have to move eventually given headwinds facing the global economy.

However, the timing has been pushed out with interbank futures now implying a 45 per cent chance of a cut by May, compared to 60 percent before the data.

The RBA has made it clear it would prefer any further stimulus to come through a lower Australian dollar, but is being thwarted by the drastic easing of central banks elsewhere.

The Bank of Japan only recently joined the club of negative interest rates and the European Central Bank is widely expected to cut further below zero next week.