Australia’s economy showed minimal growth in the first quarter, held back by cautious consumer spending and a sharp slowdown in government expenditure, which had previously driven activity.
In response, the Reserve Bank of Australia (RBA) has already lowered interest rates twice since February, bringing them to 3.85%. Meeting minutes from May revealed the central bank was even considering a larger 0.5 percentage point cut, amid concerns that rising US tariffs were clouding the global economic outlook.
“The main takeaway is that the expected tentative recovery in private demand continues to underwhelm. Without a material pick-up in private demand, the economy could be set for a period of subdued growth,” said Pat Bustamante, a senior economist at Westpac.
Real GDP increased by just 0.2% in the March quarter, a marked deceleration from the 0.6% growth recorded in the previous quarter, according to data released on Wednesday by the Australian Bureau of Statistics. The result fell short of market expectations, which had predicted a 0.4% rise, Reuters reports.
On an annual basis, GDP growth stagnated at 1.3%, disappointing analysts who had anticipated an improvement to 1.5%. The figure also remains significantly below the long-term trend rate of 2.5%, once regarded as the benchmark for “normal” growth.
The soft GDP figures were largely anticipated following Tuesday’s weak partial data, which prompted some analysts to lower their growth forecasts to as little as 0.1%. As a result, market reaction was muted. The Australian Dollar held steady at $0.6466, while three-year bond futures gave up earlier gains, ending flat at 96.67.
Interest rate markets now suggest an 80% chance of a rate cut in July, with expectations for nearly 100 basis points of total easing, bringing the cash rate down to around 2.85% by early next year.
Furthermore, according to the Australian Bureau of Statistics (ABS), government spending was unchanged in the March quarter, marking its largest drag on economic growth since 2017.
The ABS also noted that severe weather events disrupted mining, tourism, and shipping activities, leading to declines in both domestic final demand and exports.
Additionally, GDP per capita slipped back into negative territory, dropping 0.2% after a modest increase in the previous quarter.
“While there may be a temptation to overlook the adverse impacts of the weather, the lack of acceleration in the annual growth rate reinforces the case for the RBA to continue easing,” according to Tony Sycamore, analyst at IG.
“We expect the RBA to cut rates by 25 basis points at its meeting in July, bringing it to 3.60%.”
Treasurer Jim Chalmers on Wednesday welcomed the fact that growth remained positive, despite the challenging and uncertain global economic environment.
“With all the uncertainty in the world, any growth is a decent outcome even modest growth is welcome in these global economic circumstances," Chalmers stated.