Australia's economy grew at its fastest pace in over a year last quarter as aggressive policy stimulus drove a revival in consumer and business spending, supporting the case for an early rise in interest rates.

The annual pace of growth of 0.6 per cent was also the highest of any developed nation, one reason investors are betting it will lead the world in reversing past rate cuts.

As a result the local dollar rose while bill futures slipped as investors priced in a greater chance the Reserve Bank of Australia (RBA) might tighten as early as November.

'Another quarter where growth has exceeded the Reserve Bank's expectations,' said David de Garis, a senior markets economist at National Australia Bank. 'It's not yet at that point where they are ready to pull the pin on the first hike, but November is a live date at this time.'

By one measure markets were now almost fully priced for a hike to 3.25 per cent in November, while a Credit Suisse gauge shows 176 basis points of tightening is already factored in for the next 12 months.

The RBA itself kept rates at a record low of 3.0 per cent after its monthly policy meeting on Tuesday and surprised some by saying such a stimulatory policy was justified for now given lingering uncertainties at home and abroad.

A slump in global share markets in the last couple of days had stirred fresh concerns about the world outlook.

Yet, Australia was still out-performing most of the developed world, thanks in large part to a stable banking system and China's insatiable demand for resources.

'Today's national accounts show that the Australian economy has been the best performing advanced economy over the past year and the only advanced economy that has recorded positive growth over this period,' crowed Treasurer Wayne Swan.
Stimulated

Wednesday's report showed Australia's gross domestic product (GDP), the value of all goods and services, rose 0.6 per cent in the three months to June, from the previous quarter when it rose 0.4 per cent. That beat forecasts of a 0.2 per cent increase and was the highest outcome since the first quarter of 2008.

Output for the 2008/09 financial year totaled A$1.09 trillion ($901 billion), or A$50,549 for every man, woman and child.

The pick-up in growth owed much to early aggressive stimulus, with the RBA slashing rates by 425 basis points between September and April and the Labor government launching over A$52 billion in pump priming, a lot of which has yet to feed through.

All of which helped lift household consumption by 0.8 per cent, so contributing 0.5 percentage points to growth.

Businesses were also encouraged to spend big by a tax break on equipment investment and also added 0.5 percentage points to GDP in the quarter.

One surprise, and a possible reason for caution, was a 0.5 per cent contribution from inventory growth in public authorities. That covers everything from education to defence and without it, growth would have been near flat for the quarter.

Higher imports were a drag, as was weakness in home and commercial building. But a sharp rise in approvals to build new homes in recent months suggests that sector should add to growth as the year progresses.

'All in all, not only has Australia managed to avoid a technical recession but activity was running at an annualised 2 per cent in the first half compared with contraction in the rest of the developed world -- impressive,' said Su-Lin Ong, a senior economist at RBC Capital Markets.

'The RBA is likely to be feeling increasingly uncomfortable with the 'emergency' setting of the cash rate given Australia's  status as a clear growth outperformer.' – Reuters