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Economy: Steady as she goes

Australia’s economy grew at close to its long-term average in the three months to December, with gross domestic product rising 0.6%.

The economy grew 3.1% compared to the previous year, according the Australian Bureau of Statistics (ABS). A surge in volumes of iron ore and coal exports offset falling prices for our two largest export commodities, and despite weak household spending. Iron ore giants Rio Tinto Limited (ASX: RIO), BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG) have all ramped up production in the last twelve months and look likely to continue expanding production in 2013, partly to offset lower commodity prices.

Australia’s terms of trade, a measure between the prices of exports and imports, slipped 2.7% in the December quarter, following a 5.3% slide in the September quarter. Overall, the terms of trade fell 12.9% compared to the previous corresponding period, reflecting massive drops in prices for iron ore and coal.

Australian households apparently continue to save money, with the household savings ratio at 10.2% in the December quarter, down slightly from the previous quarter. Since around 2005, Australians have been socking more and more money away, although that appears to be sliding slightly.

What was perhaps surprising was Australia is very much in the grips of a two-speed economy, with Victoria, South Australia, Tasmania and the ACT slipping into recession. Western Australia, Queensland, New South Wales and the Northern Territory have significant mining or oil and gas projects underway, so perhaps no surprise that they are powering along.

Foolish takeaway

After iron ore prices slumped to below US$90 a tonne in September last year, they have gradually recovered, and have recently traded close to US$160 a tonne. That should mean exports for the first three months of 2013 will be boosted by record volumes and higher prices. However, the iron ore price appears to be trending down, having fallen in seven of the last trading sessions, and has now dropped below US$150 a tonne. Where it will end up, no-one really knows, but many analysts are expecting prices to stabilise somewhere above US$100 a tonne.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in BHP.

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