Momentum in the Australian economy remained soft through the opening months of 2025, with real GDP growth slowing more sharply than expected to 0.2% in the March quarter (vs 0.4% forecast) from 0.6% in the December quarter. Cyclone Alfred and other adverse weather events played a role, but year-ended growth is well under par holding steady at 1.3%. The economy has work to do if growth is to pick up as the RBA forecasts to 2.1% by year-end and keep a slowdown at bay as the effects of the US administration's tariff policies start to bite offshore. Domestically, there are emerging signs that the hand-off from the public sector - the mainstay of growth since the middle of 2023 - to the private sector is starting to get going, the latter driving growth for the second quarter in succession. But further RBA rate cuts will be needed with households still being kept quiet by the earlier headwinds of the tightening cycle and cost-of-living pressures.
Growth in the March quarter was driven by private demand, offsetting a contraction in public demand. This is partly a statistically driven shift due to government electricity rebates wearing off: household spending on electricity is now rising while government spending on the rebates is falling. Nonetheless, household consumption (0.4%), dwelling investment (2.6%) and business investment (0.4%) all contributed to growth in Q1.
In addition to public demand, net exports weighed on growth. Trade activity to front run the US administration's tariffs announced on April 2 had limited effect on Australia's exports at the headline level - a different story to other countries where growth has been boosted by a surge in US-bound exports.
The main story remains around households. The dynamics continue to improve: real incomes rose 3.6% over the year - their fastest pace in more than 3 years - the labour market remains resilient, and the RBA started to lower rates in Q1; but households have been slow to respond as consumption growth was clocked at a very subdued 0.4% pace in the quarter and 0.7% through the year. Households are clearly cautious given the uncertain economic outlook, reflected in the saving ratio rising from 3.9% to 5.2% - its highest level since Q3 2022.
More to come.
