Australia’s economy barely grows in first quarter as spending drops

SYDNEY - Australia’s economy barely grew in the first quarter as consumers stayed stubbornly frugal and government spending, the engine of activity in 2024, sputtered to a standstill, underlining the need for more policy stimulus.

Real gross domestic product (GDP) rose 0.2 per cent quarter on quarter in the three months to March, Australian Bureau of Statistics (ABS) data showed on June 4, missing market forecasts of 0.4 per cent.

Year-on-year growth flatlined at 1.3 per cent, when analysts had looked for a pick-up to 1.5 per cent, and remained well short of the 2.5 per cent pace that used to be considered “normal”.

The Reserve Bank of Australia (RBA) has already cut interest rates twice since February to 3.85 per cent and the minutes of the May policy meeting showed that it was open to an outsize half-point move as US tariffs darkened the outlook for the global economy.

“The main takeaway is that the expected tentative recovery in private demand continues to underwhelm,” said Mr Pat Bustamante, a senior economist at Westpac. “Without a material pick-up in private demand, the economy could be set for a period of subdued growth.”

Swaps imply an 80 per cent probability of a rate cut in July, with a total easing of almost 100 basis points priced in to a bottom of 2.85 per cent by early 2026.

The ABS said government spending was flat to make the largest drag on growth since 2017. Extreme weather events also affected mining, tourism and shipping and reduced domestic final demand and exports, it added.

GDP per capita was back in negative terrain, falling 0.2 per cent in the quarter after a small rise previously.

“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,” said Mr Tony Sycamore, an analyst at IG.

“We expect the RBA to cut rates by 25 basis points at its meeting in July, bringing it to 3.6 per cent.”

Treasurer Jim Chalmers welcomed the still positive growth against the uncertain global economic outlook.

“With all the uncertainty in the world, any growth is a decent outcome; even modest growth is welcome in these global economic circumstances,” Mr Chalmers told a press conference.

The report showed the household savings ratio jumped to 5.2 per cent, the highest since the third quarter of 2022, as consumers chose to save rather than spend. That is partly why household consumption edged up a tepid 0.4 per cent in the quarter, adding just 0.2 percentage point to GDP growth despite lower borrowing costs and cooling inflation.

“The households are rebuilding their balance sheets but that’s not being converted into spending,” said Mr Benjamin Picton, a senior macro strategist at Rabobank, who expects a rate cut in July.

“I think if we do see a few more rate cuts start to flow through... that should give consumer confidence a bit of a shot in the arm, we think, and maybe we’ll start to see a bit of a response in household consumption.” REUTERS