The Australian economy expanded by a weaker-than-expected 0.2% in the March quarter, leaving growth through the year unchanged at a sub-par 1.3%. Growth had accelerated (0.6%) in the December quarter but then slowed sharply from the turn of the year. This was partly attributable to the effects of Cyclone Alfred and other adverse weather events but also reflected softer consumption growth as households remained cautious given developments offshore.
Uncertainty around global trade due to impending tariff announcements by the US administration saw growth across OECD economies slow to 0.1% in the March quarter, the weakest pace since the pandemic. First quarter growth in some countries was juiced up by US export orders that were brought forward to front run tariffs; however, in China - Australia's largest trading partner - growth slowed from 1.6% to 1.2%.
In Australia, a long-standing theme has been that that public demand has been the major driver of economic growth. However, that is beginning to shift. Private demand drove growth for the second quarter in succession, offsetting a contraction in public demand.
Going forward, there are questions around the durability of the pick-up in private demand. Household sentiment was boosted by the RBA commencing its easing cycle with a 25bps rate cut in February but remains at pessimistic levels. Global trade uncertainty has since seen sentiment fall back, despite a follow-up cut from the RBA in May, and this is also a headwind to the outlook for business investment in an open economy like Australia where trade is a key component.
There is work to do if economic growth is to meet the RBA's year-end forecast of 2.1%, a task made harder by global growth that is set to come under pressure from trade uncertainty. Further RBA rate cuts will be required and the next meeting on 7-8 July is live. The national accounts continued to imply productivity growth remains weak: GDP per hour worked was down 0.9% through the year, but monetary policy can do little about that. From the RBA's perspective, productivity is relevant for the inflation outlook. Growth in unit labour costs is still elevated (3%Y/Y in real terms), but it is well down from its earlier highs.
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National Accounts — Q1 | Expenditure: GDP (E) 0.2%q/q, 1.4%Y/Y
Household consumption (0.4%q/q, 0.7%Y/Y) — Cautious households have remained reluctant to spend even as real incomes picked up at their fastest pace over the past year (3.6%) since late 2021. Cost of living and interest rate pressures are still front of mind. The RBA's easing cycle did commence in February, but that will take time to kick households into gear.
Household consumption growth was softer this quarter at 0.4% (from 0.7%), partly due to the impacts of Cyclone Alfred and other adverse weather events; however, the weak pace of growth through the year at 0.7% speaks to the broader headwinds households have faced. Growth in the consumption basket continues to be led by essentials (0.4%q/q, 1.1%Y/Y), boosted notably this quarter by utilities (10.2%) with electricity rebates rolling off state and federal government books.
As mentioned, real incomes are rising solidly, up 1.7% in Q1 to 3.6% year-on-year. Inflation has cooled substantially, returning to the RBA's 2-3% target band in the quarter, and the labour market has remained robust. Incomes in Q1 were further boosted by social assistance support (5.1%) and non-life insurance payments (12.8%) post cyclones and floods, while the RBA's February cut was another support. With income growth outpacing consumption, the household saving ratio climbed 1.3ppts in the quarter to 5.2%, its highest level since Q3 2022.
Dwelling investment (2.6%q/q, 5.6%Y/Y) — Posted its strongest quarterly rise (2.6%) since Q1 2021 to be up by 5.6% through the year, accelerating from 3.5% previously. Both new home building (2.3%) and renovations (2.9%) contributed to the strong result. But capacity pressures and higher interest rates - both legacies from the pandemic - continue to impact, leaving the level of residential construction activity down on its recent cycle highs from 2018 and 2021.
Business investment (0.4%q/q, 1.5%Y/Y) — Has slowed sharply amid a cooling domestic demand backdrop and rising uncertainty around the global outlook. A modest increase of 0.4% in the March quarter saw annual growth come in at 1.5%, well down from a 5% pace a year ago. Equipment investment - notably in IT - has come off sharply (-1.4%q/q, -2.6%Y/Y), but non-dwelling construction (1.7%q/q, 2.4%Y/Y) has been supported by mining and renewable energy projects. Intellectual property (0.9%q/q, 7.9%Y/Y) has remained the area of strength.
Public demand (-0.6%q/q, 3.5%Y/Y) — Down 0.6% in Q1, its first quarterly contraction since Q2 2022 and its weakest outcome stretching back to mid 2014. Annual growth eased from 5.2% to 3.5% but was still comfortably the largest driver of economic growth over the period. Growth in public spending stalled (0%), but that was partly driven by household energy rebates winding down and it remains at elevated levels. Meanwhile, new investment contracted sharply (-2.8%) but the pipeline of projects underway is still sizeable.
Inventories (0.1ppt in Q1, -0.3ppt yr) — Inventory levels increased by around $1.1bn in the quarter adding a modest 0.1ppt to GDP growth. Non-farm inventories were the key driver ($1.8bn) on the back of a build in the mining sector ($1.1bn) as adverse weather delayed shipments to offshore markets.
Net exports (-0.1ppt in Q1, -0.1ppt yr) — A modest drag on Q1 GDP, not delivering the boost to growth seen in other countries from US-bound exports brought forward to front run the Trump administration's tariffs. Exports were down 0.8% in the quarter (-0.2% Y/Y) on reduced overseas student arrivals and as resources shipments were hampered by adverse weather and high portside inventory levels in China. However, non-monetary gold exports surged, largely driven by the US. Imports fell 0.4%q/q (0.4%Y/Y), their weakest quarterly result since late 2023. A lower Australian dollar weighed on overseas travel (-2.4%) while goods orders also weakened (-0.3%), their 3rd decline in the past 4 quarters.
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National Accounts — Q1 | Incomes: GDP (I) 0.2%q/q, 1.4%Y/Y
Incomes rose in the March quarter amid a backdrop of growth in nominal GDP of 1.4%, holding annual growth at 3.7%. The terms of trade were held broadly flat (0.1%) as export prices (2.7%) on the back of higher demand for iron ore, non-monetary gold and rural goods rose at a similar pace to import prices (2.6%), with a weaker Australian dollar playing its part.
Company profits advanced in the quarter, with non-financial corporations up 0.6% and financial corporations posting a 1.9% rise - its fastest quarterly increase in more than 2 years coming despite the RBA's rate cut. Gross mixed income - small company profits - rose 3.2%, posting their strongest back-to-back gains since the pandemic. Over the past year, non-financial corporations (-5.7%), weighed by falling commodity prices hitting the mining sector, have underperformed financial corporations (6.2%) and gross mixed income (5.4%).
Robust labour market conditions have continued to underpin growth in the compensation of employees, up a further 1.5% in the quarter and 6.5% through the year. Reforms to boost wages growth in the care sectors were a factor in this latest increase. Meanwhile, enterprise agreements boosted pay in some areas of the public sector.
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National Accounts — Q1 | Production: GDP (P) 0.2%q/q, 1.2%Y/Y
By industry, the services sectors made the strongest contributions to growth amid mixed outcomes in goods-related sectors. Business services advanced 0.7% in the quarter, as telecommunications (2.1%) and finance and insurance (0.8%) led the way. A 0.7% rise was also seen across household services. The key contributors were education and training (1.3%), other (3.6%) and arts and recreation services (0.9%).
Turning to the goods sectors, weakness was driven by mining (-2%) as output was hampered by Cyclone Zelia in Western Australia and wet weather in Queensland. Manufacturing (-0.7%) was also weak where disruptions at oil refineries were a factor. Areas of strength were in construction (0.8%) and wholesale trade (1.0%), the latter supported by vehicle demand.
