Australia's economy suffers weakest showing in 8 years in third quarter

Shipping containers for import and export are seen in Melbourne, Victoria, Australia on Dec 7, 2016.
Shipping containers for import and export are seen in Melbourne, Victoria, Australia on Dec 7, 2016.PHOTO: EPA

SYDNEY (Bloomberg) - Australia's economy shrank the most in almost eight years in the third quarter as government spending fell and imports rose. The local currency slumped.

Gross domestic product fell 0.5 per cent from the previous quarter, when it gained a revised 0.6 per cent. Economists had estimated a 0.1 per cent drop.

The economy grew 1.8 per cent from a year earlier, compared with a forecast 2.2 per cent gain.

The contraction was the biggest quarterly decline since end of 2008.

The report spans a period when Australia's election returned Prime Minister Malcolm Turnbull with a razor-thin majority and government spending and resource exports failed to lift growth.

The slowdown in annual growth from 3.1 per cent in the second quarter is dramatic, particularly when the Treasury estimates the economy's potential at 2.75 per cent and central bank forecasts match or exceed that level.

"We're still confident that this is just a perfect storm of negatives and we shouldn't be talking about technical recessions. - we should be talking about what rebound we can expect for the fourth quarter," said Ms Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. "It just seemed like an unexpected confluence of negatives that all happened to be concentrated in one quarter."

The Australian dollar fell to 74.20 US cents at 11.56am in Sydney, compared to 74.67 US cents before the data.

Wednesday's data also showed: Imports rose 1.3 per cent, subtracting 0.3 percentage point.

The household savings ratio fell to 6.3 per cent from a revised 6.7 per cent.

The terms of trade, a gauge of export prices relative to import prices, rose 4.5 per cent.

Household spending rose 0.4 per cent, adding 0.3 point.

Australia's transition away from mining is relying on industries like tourism and education that are among the most sensitive to the currency's fluctuations.

A predicted tightening by the US central bank this month may exert downward pressure on the currency and help Australia's exporters. About 1 per cent of GDP growth comes from resource exports.

The resurgence of iron ore, Australia's biggest earner, took a pause in the three-month period; at the other extreme, coking coal jumped 130 per cent as China tried to rein in excess output. Australia is enjoying a renewed windfall from the world's No. 2 economy, where fiscal stimulus raised demand for resources from Down Under.