CBA Commonwealth Bank Of Australia

SYDNEY—Australia's economy grew at its fastest pace in 3½ years in the first quarter, outpacing other advanced economies even as it added more uncertainty to the outlook for interest rates.

Gross domestic product grew 1.1% in the first quarter from the fourth quarter and 3.1% from a year earlier, a government report showed Wednesday. Economists surveyed by The Wall Street Journal had expected 0.9% growth from the previous quarter and a 3.0% year-over-year rise.

With a month to go before a federal election, Treasurer Scott Morrison embraced the news, saying the data confirm that a transition in the economy away from mining was evident.

"[Australia's growth is] faster than the United Kingdom, the United States, the eurozone. It's more than twice the growth we're seeing in Canada, faster than Singapore, faster than New Zealand and now even faster than South Korea," he said.

Economists say higher export volumes of iron and liquefied natural gas are supporting growth, helping to offset lower commodities prices as a decadelong mining boom comes to an end.

"The mining investment boom is paying dividends and the lower Australian dollar is boosting services, thereby fostering a rebalancing of the Australian economy," said Andrew Hanlan, a senior economist at Westpac.

In addition, unemployment has fallen to a 2½ -year low, helping to lift consumer spending.

Michael Canturi, 35, the owner of Dahlias Cafe, an eatery in Campbelltown, a suburb on the outskirts of Sydney, said he invested 300,000 Australian dollars (US$216,960) recently to expand his small business.

But not all retailers are experiencing the same growth, Mr. Canturi said, though those in hospitality tend to do better as more consumers find room in their budgets to eat out.

Australia is also experiencing strong residential housing construction, led by a boom in apartments, while a lower Australian dollar is lifting services exports, leading to strong growth in industries like tourism, health care and education.

Still, falling mining investment is likely to be a drag on growth for the next year at least, economists say.

Some economists say that the stellar growth is based mostly on exports, leaving the country exposed to global shocks, while income growth has been constrained as commodities prices remain weak.

Gareth Aird, an economist at the Commonwealth Bank, said the circumstances now facing the economy, which include surging growth and the slowest pace of wage growth in 30 years, were "bizarre."

The Reserve Bank of Australia cut interest rates on May 3 to a record low of 1.75% after the economy slid into deflation in the first quarter. Economists had widely forecast further cuts before the GDP report; some continue to expect more cuts over the next year.

The Australian dollar rallied after the release of the economic-growth data, as bets on a further interest-rate cut were pushed back into next year.

Jasmin Argyrou, a senior-investment manager at Aberdeen Asset Management, said there was a growing disconnect between Australia's economic activity and inflation, which remains below the central bank's comfort level.

"Against this solid economic backdrop, monetary easing will be very gradual and it could be a long time between cash rate cuts," she said.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

June 01, 2016 03:25 ET (07:25 GMT)

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