Australia’s gross domestic product (GDP) posted its strongest growth in two years during the first quarter, which suggests the economy’s long-awaited transition from its dependence on the resource sector could finally be underway.

According to the Australian Bureau of Statistics (ABS), GDP grew at a seasonally adjusted 1.1 percent sequentially during the first quarter and 3.5 percent year over year. The former number beat economists’ estimates by a substantial two-tenths of a percentage point, while the latter exceeded projections by three-tenths of a point.

Australia’s economy boasts an incredible run: The country’s GDP has now grown for 22 consecutive years.

The ABS reported that growth for the quarter was driven by a 1.4 percentage point contribution from net exports and a 0.3 percentage point contribution from final consumption expenditure. These performances were partially offset by a decline of six-tenths of a percentage point from changes in inventories.

Although the peak in mining investment is now past, the sector is expected to continue to be a major contributor to GDP growth through production and exports. During the first quarter, the mining industry contributed 0.9 percentage points to GDP growth.

The Reserve Bank of Australia (RBA) has kept short-term rates at a record low of 2.5 percent, with the hope that a period of stability at current levels will be sufficient to foster growth from the non-mining sectors.

Thus far, rate-sensitive sectors such as real estate have led the way, though some analysts fear the country’s housing market could be forming a bubble.

In the announcement following its latest decision on monetary policy, RBA Governor Glenn Stevens observed that in addition to the strong expansion in housing construction, there’s also been moderate growth in consumer demand.

Even so, he noted that though there are emerging signs of improvement in investment intentions in some non-mining sectors, these plans remain tentative, as cautious firms await more evidence of a rebounding economy.

In addition to the housing sector, the retail space has also exhibited strength over the past year. The ABS reported that retail turnover rose a seasonally adjusted 0.2 percent in April, following growth of 0.1 percent in March.

Although this result fell short of economists’ expectations by a tenth of a percentage point, it marked the twelfth consecutive month of growth in this space.

Department stores were the largest contributor to retail turnover, up 2.9 per cent, followed by food retailing (0.2 percent), cafes, restaurants and takeaway food services (0.5 percent) and clothing, footwear and personal accessory retailing (0.2 percent). These performances were partially offset by declines in household goods retailing, down 1.0 percent, and other retailing, which fell by 0.2 percent.

The drop in spending on household goods is somewhat surprising, given the strong real estate market. For instance, sales in the furniture and floor coverings segment decreased by a substantial 6 percent in April, following a period of sustained growth. However, economists believe this could simply be related to the timing of the Easter holiday.

Economists with Westpac recently detailed the three key steps necessary for Australia’s economy to continue its transition. The first involves growth from rate-sensitive sectors, which is already happening with housing, and the second involves an increase in consumer demand, for which retail numbers show evidence.

But the final step is trickier, especially given the risk-averse psychology currently prevalent among business owners, which the RBA mentioned in the remarks we cited earlier. Consumer demand must be strong enough to spur higher capacity utilization, and ultimately the rise in business investment (i.e., spending on machinery, equipment, and hiring) that precipitates all virtuous economic cycles.

Thus far, the so-called wealth effect from rising home values has yet to fully translate into increased spending, perhaps in part because of sluggish income growth and concern about the employment market. That’s resulted in a strong savings rate that sustained itself through the first quarter, as cautious households continued to set aside earnings. Westpac expects consumer spending to remain soft through at least mid-year.

Still, the consensus among economists surveyed by Bloomberg is for Australia’s economy to grow by 2.8 percent this year, or roughly four-tenths of a point better than last year. That’s also three-tenths of a point better than the forecast for the US. So the trend is headed in the right direction, even if growth is not especially robust yet.

Portfolio Update

The drama surrounding Conservative Holding Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF) continues. In March, Stockland Corp Ltd (ASX: SGP, OTC: STKAF) swooped in to buy a 19.9 percent stake in the real estate investment trust (REIT) at an average price of AUD3.78 per unit from CapitaLand Ltd (Singapore: CAPL, OTC: CLLDF).

Then in April, Stockland, Australia’s largest diversified REIT, made a takeover bid for the rest of Australand’s units, offering 1.111 of its own shares for each Australand share, or the equivalent of AUD4.20 per share.

Stockland had been expected to make such a move at some point, since CEO Mark Steinert was known to be keen on expanding the REIT’s exposure to retail and industrial properties. He had previously observed that Australand’s AUD2.4 billion portfolio of office and industrial properties was complementary to Stockland’s assets.

However, that offer actually valued Australand at 2 percent below its AUD2.48 billion market capitalization at the time, so the REIT rejected the offer.

In late May, Stockland sweetened its bid, with an offer that values Australand at AUD2.5 billion. Stockland offered 1.124 of its own shares for each Australand security, equivalent to AUD4.35 per share, through an off-market takeover bid. It also made an alternate proposal that reduced the ratio of shares, but included AUD250 million in cash.

Then earlier this week, Singapore-based real estate company Frasers Centrepoint Ltd (OTC: FRZCF), which is controlled by Thai beer billionaire Charoen Sirivadhanabhakdi, came in with a competing all-cash offer of AUD4.48 per share, which values Australand at AUD2.6 billion.

Australand’s board said it intends to recommend the offer, unless Stockland returns with a higher bid. Frasers’ offer would still have to clear Australia’s Foreign Investment Review Board.

In the meantime, Stockland is weighing its options, including the possibility of a future negotiation with Frasers to purchase some of Australand’s industrial properties and apartment development projects, according to The Australian.

And if the REIT walks away from the deal, it would still net AUD74 million from the sale of the 19.9 percent stake it acquired earlier this year.