Australia economy surprisingly strong in Q2

SYDNEY, Sept 7 (Reuters) - 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 percent in the second quarter, handily beating forecasts and more than recouping the first quarter's flood-driven 0.9 percent decline. Growth for the year was 1.4 percent, 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.

'Basically this validates the RBA's view that the Australian economy's entered into the current period of global turmoil in pretty good shape,' said Katie Dean, head of Australian economics at ANZ.

'We actually think the RBA's probably going to stay on its hands for a fairly extended period,' she added. 'Whilst the economy is going very well at the moment, it does still face some challenging times over at least the next six months.'

The RBA held its September meeting on Tuesday and kept rates unchanged at 4.75 percent 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 <0#YIB:> still imply around 68 basis points of cuts by Christmas, but that has come back from a peak of more than 160 basis points last month.

In a speech in Perth, the RBA's Stevens emphasised that it was far too early to say how the turmoil in markets might affect global growth, or policy at home.

'Periods of sudden increases in anxiety within international financial markets are moments when, if at all possible, it is good to be in a position to be able to maintain steady settings,' Stevens told an industry conference.

EPOCHAL EVENT

Adjusted for inflation, Australia's annual economic output reached A$1.3 trillion for 2010/11, or A$58,167 for each of its 22.5 million people. That compares to $42,468 of GDP for each U.S. citizen in the second quarter.

The major surprise last quarter was a 1.0 percent 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.

'The resilience of households was the stand-out factor,' said Brian Redican, a senior economist at Macquarie. 'These are good numbers for the RBA and should quieten talk the economy is somehow falling apart.'

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 percent in the quarter to an all-time high.      

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