Australia's strong economic growth has prompted speculation of an RBA rate rise. Picture: Bob Finlayson Source: The Australian
AUSTRALIA'S comeback on the global stage as one of the world's best-performing economies sent the sharemarket and dollar surging yesterday.
The return has raised hopes the confidence would be embraced by major international investors.
The economy grew by 1.2 per cent during the June quarter and 3.3 per cent for the year. The result easily surpassed the market's forecast of 0.9 per cent, and prompted instant speculation the Reserve Bank would be forced to tighten interest rates before year's end.
The national accounts figures showed consumer spending rebounded during the quarter, while the resources boom was responsible for an 11 per cent rise in company profits -- the second-largest increase in two decades.
The results prompted a surge on the Australian equities market, with the strongest gains made in sectors linked to the performance of the economy.
The benchmark S&P/ASX 200 closed up 91.5 points (2.1 per cent) at 4495.7. The increase was the biggest one-day gain in two months and takes the index to its highest level in three weeks.
The All Ordinaries surged 88 points (1.9 per cent) to 4526.8.
The Australian dollar was a beneficiary of the better-than-expected economic data, as it traded at US90.10c last night in the international session, up from US88.93c on Tuesday night.
The momentum behind global equities was positive early yesterday after US President Barack Obama signalled his administration would consider fresh tax cuts and infrastructure spending as part of its stimulus packages.
There were also increasing signs of Chinese strength, with data showing manufacturing output rising to a three-month high.
Citi's head of Australian equities distribution, Grant Eshuys, said the three pieces of positive news were welcomed by the market. "The market started out of the blocks and then on the back of the GDP numbers, that gave it another leg up," Mr Eshuys said. "It's a combination of positive events."
The buying was focused on the big banks, mining and gold stocks.
An analysis of global trends by the Royal Bank of Scotland showed Australia now had the fourth-strongest quarterly economic growth in the world, behind China, India and Korea.
Mr Eshuys said the strong GDP numbers contradicted the view of some major offshore investors who had increasingly believed of late that Australia's economic performance could not be sustained.
"I think there is still some scepticism on the domestic economy, particularly from overseas investors who have been thinking that interest rates in Australia are too high and could have to be cut," he said. "The GDP numbers could prompt them to think maybe not."
A widening divide has emerged on the future of interest rates. Local economists believe that if the economic growth places further pressure on inflation, alongside a stronger jobs market, the RBA could have to tighten rates before the end of the year.
However, international investors are betting that the RBA could be forced to cut rates, especially if the US economy falters.
The futures market is tipping the prospect that the RBA could be forced to cut the official cash rate from its current 4.5 per cent.
The chance of a rate cut before the end of the year stands at 28 per cent, while the market tips there is an 8 per cent likelihood it could be reduced at the central bank's meeting on Tuesday.
RBC Capital Markets senior economist Su-Lin Ong said fears of a US double-dip recession prompted overseas investors to question whether Australia would be shielded from a fresh downturn. "There is a view offshore that while Australia is leveraged to China, it's not immune," she said.
"We have seen that this economy can prove more resilient if the US does go backwards but there's a view that by international standards our interest rates are high. By Australian standards they are at probably the average of the last decade."
