Australian economy grows faster than expected, raising rate hike risk

Australia's economy grew 0.4 per cent in the June quarter, slightly beating most economist forecasts and further raising the prospect of an interest rate hike as soon as this month.

The economy grew 2.1 per cent over the past year to June 30, seasonally adjusted, according to the latest Australian Bureau of Statistics National Accounts.

Both numbers were slightly ahead of economist forecasts, which had centred on a quarterly rise of 0.3 per cent and annual economic growth of 1.8 per cent.

Treasurer Jim Chalmers said the numbers provided further evidence of Australia's relative economic outperformance in challenging global circumstances.

"Annual growth in Australia was as strong or stronger than every major advanced economy – equal to the United States and much stronger than the rest," he said in a press release soon after the data came out.

September rate rise risk sits at 70pc

However, IFM Investors chief economist Alex Joiner said the National Accounts highlighted the unsustainability of the growth given current economic conditions.

"Productivity remains poor, per capita GDP was flat [and has lagged other advanced economies materially] and unit labour cost growth elevated," Dr Joiner said.

"The economy risks not slowing quickly enough for the RBA to achieve its inflation objectives and as such it should raise rates in either September or November."

Traders have subsequently pushed up the odds of a September rate hike by the Reserve Bank of Australia to about 70 per cent, according to Bloomberg analysis of futures market pricing.

A rate hike by November is fully priced in, with traders betting on a 20 per cent chance of hikes in both September and November.

Market pricing suggests the RBA's cash rate will peak at 4.8 per cent by the middle of next year, almost two rate rises higher than the current level of 4.35 per cent.

"With GDP growth and inflation holding up better than the RBA had anticipated, the bank will probably hike rates again before long, perhaps as soon as this month," said Marcel Thieliant from Capital Economics.

"A rate hike isn't a done deal yet. After all, the labour market is now clearly loosening and revised data show that the housing downturn has accelerated."

Housing investment and EV boom drive GDP growth

Despite the house price downturn, Mr Chalmers said the National Accounts showed that increased dwelling approvals over the past 18 months were translating into more residential construction.

"A heartening part of today's figures was dwelling investment growth which picked up and broadened in the quarter," he said.

"There were contributions from both new building investment and renovation activity.

"Dwelling investment grew 1.6 per cent in the quarter to be 5.8 per cent higher through the year. This is up from 1.5 per cent in the previous quarter and 4.2 per cent in annual terms."

The National Accounts showed a slowdown in annual household consumption growth, which Mr Chalmers said was propped up by a surge in electric vehicle purchases as fuel prices surged on the Iran conflict.

"Purchase of vehicles was up 10.3 per cent in the quarter and accounted for almost two-thirds of the quarterly increase in consumption," he said.