The Australian economy expanded a mere 0.2% in Q3, according to data reported at midday today, Canberra time. This was the smallest quarterly increase in a year. Australian GDP data are expressed in chained A$, with fiscal 2004 as the reference year, Q3 2003 to Q2 2004. Press reports and market participants focused on the "slow" advance, and the A$ fell in foreign exchange markets.

However, Q2 growth was an outsized 1.3%, and as seen in the table below, included sizable gains in private fixed investment, 6.7%, and government consumption, 1.3%. Thus, the small Q3 result could mark a return to a more normal path, rather than a cyclical weakening. The investment item slowed to a 0.5% increase in Q3 and government spending decreased by 0.6%. Exports were also strong in both Q1 and Q2, so their shrinkage in Q3 could also be more a reaction to that strength than a turn toward a new trend. In the meantime, household consumption is growing fairly steadily, with 0.6% in both Q2 and Q3, making a 2.8% annualized rate for the first three quarters of this year.

Even with the moderation in Q3, the capital formation figures highlight strength in business investment generally. Nonresidential buildings and other structures are up 24.5% from a year ago, showing 2005 as a rebound year after a slowdown last year to "only" 4.2% growth. Five-year expansion of those capital investments has run at an 8.7% annual rate. Machinery and equipment expenditures have had an erratic quarterly pattern, down in Q1, up 10.6% in Q2 and up a slim 1.5% in Q3, but they are running 15% above a year ago, close in line with 16% over the past four years.

Thus, despite the Q3 slowdown, the Australian economy looks vigorous, with growth in several diverse sectors. Obviously, though, as with all countries, prospects for the months ahead are clouded with the high cost of energy.