Australia at risk of GDP contraction after disappointing data

By Wayne Cole

SYDNEY (Reuters) - Australia's economy looks to have ground to a halt last quarter and could even have contracted as both international trade and government spending dragged on growth, chastening data for the country's ever-optimistic central bank.

The Reserve Bank of Australia (RBA) is holding its last policy meeting of the year and is widely expected to keep interest rates at 1.5 percent for a fourth month, in large part because it has sounded more upbeat on the economy recently.

Yet figures from the Australian Bureau of Statistics out on Tuesday suggested there was a risk the economy shrank in the third quarter, something that has only happened three times in the past 25 years.

"It's been a remarkable run but the ducks are lining up for a negative print in Q3," said David de Garis, a senior economist at National Australia Bank.

"That would test the RBA's nerve as it makes it harder to reach their 2016 growth target," he added. "But they will likely see it as temporary and hold the course."

The GDP report is due on Wednesday and analysts had already been braced for a pedestrian 0.3 percent gain in the third quarter, according to a Reuters poll. The annual pace of growth had been seen braking to 2.5 percent from a brisk 3.3 percent in the second quarter.

The risk of a negative GDP number was enough to pull the local dollar down a quarter U.S. cent to $0.7450.

Interbank futures still suggest the market sees scant chance of another cut in rates for the next few months, though any thought of a hike has also been priced out.

Tuesday's data showed government spending dipped in the third quarter, after an unusually strong run up ahead of a national election in July.

Any shrinkage in GDP would be a blow to the conservative government of Prime Minister Malcolm Turnbull which ran its election campaign on a promise of delivering "jobs and growth".

Also leaning on the economy were net exports, which trimmed 0.2 percentage points from GDP in the third quarter when analysts had looked for a neutral outcome.

The drag came even as rising commodity prices helped sharply narrow the country's current account deficit to A$11.4 billion ($8.5 billion), from A$15.9 billion in the second quarter.

That should be just a taster given export prices have surged in the past couple of months. The RBA's index of commodity prices jumped 10 percent in November alone, and if measured by spot prices was 61 percent higher on the same month last year.

"It's just as well resource prices have climbed as they have - the background would have been a lot bleaker otherwise," said NAB's de Garis.

(Reporting by Wayne Cole; Editing by Eric Meijer)