SYDNEY - Australia's economy grew at the fastest pace in four years last quarter as consumers spent big on everything from transport to clothing and cafes, setting the resource-rich country far apart from most of its developed peers. Gross domestic product (GDP) rose 1.2 per cent in the second quarter, handily beating forecasts and more than recouping the first quarter's flood-driven 0.9 per cent decline. Growth for the year was 1.4 per cent, again well above predictions. Wednesday's gloom-defying result sent the local dollar higher and supported an optimistic outlook from Reserve Bank of Australia (RBA) Governor Glenn Stevens, who poured cold water on market assumptions that emergency rate cuts might be needed. The RBA held its September meeting on Tuesday and kept rates unchanged at 4.75 per cent for a tenth month. Markets have been betting that the concerns over global growth would push the central bank into easing policy, in part because it is one of the few developed nations that has room to actually cut rates. Interbank futures still imply about 68 basis points of cuts by Christmas, but that has come back from a peak of more than 160 basis points last month. Adjusted for inflation, Australia's annual economic output reached A$1.3 trillion (S$1.67 trillion) for 2010/11, or A$58,167 for each of its 22.5 million people. That compares to US$42,468 (S$51,320) of GDP for each US citizen in the second quarter. The major surprise last quarter was a 1 per cent jump in household consumption, double what many analysts had expected and a stark contrast to complaints of tough times by retailers. The spending was also broad-based with the only weakness being in new vehicles and that was largely due to a lack of supply following Japan's earthquake and tsunami. Consumption was underpinned by strong incomes growth across the economy, which in turn owed much to sky-high prices for Australia's commodity exports, particularly iron ore and coal. The country's terms of trade, or the ratio of export prices to the cost of imports, jumped 5.4 per cent in the quarter to an all-time high. It is hard to overstate the impact of the terms of trade. It is now more than double the average of the 1990s and every year it stays up here it is worth perhaps 12 to 15 per cent of GDP in extra income, or A$150 billion to A$200 billion in hard cash. Since most of this extra income comes from a change in relative prices, it gets stripped out of the main inflation-adjusted measure of GDP. But it does show up in current price GDP, which grew 6.3 per cent in the year to June, a pace usually only enjoyed by emerging economies. Australia's resource companies are using this windfall to expand production, with more than A$148 billion of investment spending planned for 2011/12 to meet burgeoning demand from China and India. For the RBA's Stevens, the rise of these giant emerging nations is an "epochal" event for Australia. "It is without doubt overwhelmingly positive for us, even if our tendency to dwell on the downside is more prominently on display at present," he said Wednesday. REUTERS

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