Australia’s Economy Contracts Most in 20 Years

Data released Wednesday showed that annual growth in gross domestic product had slowed to a tepid 1 percent, down from 2.7 percent. The results were in line with a Reuters poll of analysts.

Damage from the flooding and Cyclone Yasi came at a time when rising utility and fuel prices were already crimping household spending and a strong Australian dollar was taking a toll on industries like manufacturing and tourism.

Add to that the effect of earthquakes in Japan and New Zealand, two major trading partners, and it is not surprising that the economy went into reverse.

“The economy has hit a temporary pothole courtesy of the natural disasters this year,” said Besa Deda, chief economist at St. George Bank.

“We are looking for the economy to recover as this year progresses, as a rebound in coal exports occurs and we get a boost from construction,” Mr. Deda said.

The Reserve Bank of Australia has said that it will look past the weather-induced slowdown in growth when setting monetary policy, believing that the effects will be temporary.

Indeed, coal exports have showed signs of recovering in March, helping push the country’s trade balance back into surplus. Analysts polled by Reuters expected data due on Thursday to show that the surplus had grown to 2 billion Australian dollars, or $2.15 billion, in April from 1.74 billion dollars in March as the recovery continues.

Australian miners have received higher contract prices for the quarter ending in June, with iron ore contract prices estimated to have been set 23 percent higher than the March quarter and coking coal contracts 45 percent higher.

That, in turn, is driving a huge expansion in mining investment, which should support growth for years to come.

Mining investment is already more than double the historic average at 4 percent of Australia’s G.D.P., and the central bank now expects that to exceed 6 percent by the 2012-13 budget year.

This investment boom is already straining the supply of skilled labor. The economy is close to full employment with a jobless rate at just 4.9 percent, a situation the Reserve Bank of Australia is watching closely.

“I think the R.B.A. is unlikely to raise rates in June, but the bad headline number really hides the strength of the economy,” said Matthew Johnson, senior economist at UBS. “The strength of domestic demand in particular tells me that the R.B.A. needs to slow demand down.”

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