Australian GDP growth slows to 0.2% in Q1

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. 

Australian Q1 GDP inputs

Data for the March quarter published by the ABS this morning points to a soft GDP growth outcome in Australia to start 2025. Weak inputs from the business, government and external sectors will likely see estimates for March quarter growth revised lower from the current expectation of around 0.4% going into tomorrow's National Accounts. 

The Trump administration's liberation day tariffs juiced up growth in many countries in the March quarter as export orders to the US were brought forward ahead of the April 2 announcements. Australia was not one of these countries, though non-monetary gold exports did surge to record highs as US-bound orders in the quarter eclipsed their total from the previous four years. But, overall, both export (-0.8%) and import volumes (-0.4%) fell in the quarter, with the ABS estimating that net exports deducted slightly from GDP growth (0.1ppt) in Q1.   

Global trade uncertainty has led to volatility in inventories, but again Australia did not see any major shift. Inventories overall lifted by 0.8% in the quarter and look like adding very modestly (0.1-0.2ppt) to GDP growth.  

Australian business conditions have been soft amid the uncertainty from offshore and from households that have been kept quiet by cost-of-living pressures and higher interest rates. Sales volumes contracted in Q1 (0.1%) in the March quarter; however, much of that was driven by the mining sector (-3.4%). Still, sales growth across the non-mining sector is running at a subdued pace, up 0.4% in the quarter and 1.2% through the year. 

Business profits have faced a range of headwinds from weaker demand, rising costs and declining commodity prices. The latest figures continue to reflect these dynamics. Profits were down 0.5% in the March quarter (-0.9% if adjusted for inventory valuation changes) contracting by 5% through the year. As with sales, the weakness centres in the mining sector where falling commodity prices have taken profits lower (-6%q/q, -19.2%Y/Y). By contrast, profits in the non-mining sector remained on the rise with a lift of 3.1% in Q1 (6.2%Y/Y). A resilient non-mining sector continues to support the labour market; the wages bill was up 1.4% in the latest quarter and 5.7% over the year. 

Public demand has been the stronghold for growth for well over a year, bolstering the economy from weakness in private consumption and investment. However, the momentum from public demand ran out of steam in the March quarter, declining by 0.5% and likely to deduct in the order of 0.2ppt from GDP growth. Government spending (in real terms) was flat in the March quarter, indicating that recovery spending from Cyclone Alfred (early March) has yet to show up. Meanwhile, public investment - despite a large pipeline of activity - took a step back in the quarter (-2.3%). 

Macro (Re)view (30/5) | Tariff noise increases

Tariff confusion became even more elevated this week, though the reaction across broad markets was fairly contained. The White House insists it will impose its liberation day tariffs one way or another despite being ruled invalid by the International Court of Trade. In a further twist, Trump announced on Friday that his sectoral tariffs on steel, which were not affected by the court's decision, would increase from 25% to 50%. Increased uncertainty as well as a potential reduction in Japanese bond issuance contributed to lower yields globally this week. Meanwhile, the USD rose off the back of the tariff court ruling but those gains were not sustained as an appeals court granted a stay on the decision. 

US inflation data was encouraging as the Fed's preferred core PCE deflator came in at a soft 0.1%m/m in April to a 2.5%yr pace, down from a prior reading of 2.6%. But as highlighted in the minutes of the Federal Reserve's policy meeting from earlier this month, tariffs are expected to push up imported goods prices, with some concern that this will lead to spillover effects on inflation more broadly. On tariffs, April data showed the largest drop in monthly imports on record (19.8%), narrowing the trade deficit from $163bn to $88bn.  

At next week's meeting, the ECB is expected to continue its easing cycle with another 25bps rate cut, lowering the depo rate to 2%. Trump said he will delay his threatened 50% tariff on European imports until July 9 (from June 1), but the growth outlook in the bloc is still under pressure. In spite of this, trade weighted euro remains around record highs, which together with a weaker growth outlook, is reducing inflationary risks and that should keep the ECB's hawks in the minority. At the Bank of England, Governor Bailey reaffirmed that the strategy of 'gradual and careful' rate cuts remains appropriate amid the uncertainty of trade tariffs on UK inflation. 

In Australia, April's CPI report showed headline inflation held at a 2.4%yr pace in the ABS's monthly gauge, in line with the more comprehensive quarterly series from Q1 (see here). Although trade developments remain the most relevant factor for $AUD exposures, the data front has Q1 economic growth figures coming up next week. My preview discusses the relevant dynamics here, with growth of around 0.4% in the quarter expected. Household consumption remains subdued as highlighted by a soft outcome of -0.1% for retail sales in April (see here). Recent momentum in dwelling approvals is now retracing (-5.7% in April) as strength in the higher-density segment is unwinding (see here).  

Australian dwelling approvals fall 5.7% in April

Australian dwelling approvals fell by 5.7% in April, failing to rebound at the 2.8% pace expected following the 7.1% drop in March (revised from -8.8%). Downward volatility in the higher-density or unit segment has weighed on headline approvals in recent months seeing recent momentum in that series retrace. Approvals remain at low levels across all types as the RBA's tightening cycle has weighed on construction activity, while capacity in the sector has focused on working through the existing pipeline.      

Headline approvals broke below the 15k level for the first time since last September as a 5.7% decline in April followed the 7.1% fall in March. Approvals actually fell for the third month running when taking February's outcome into consideration, though that particular decline was by a very minor 0.1%. For the 3 months to April, approvals averaged 15.6k, the momentum falling back to levels seen at the end of last year. 

An unwinding of higher-density or unit approvals has seen headline approvals weaken over the past 3 months. Unit approvals were down 18.9% in the latest month to 5.1k following declines of 13.9% in March and 0.6% in February. As at January unit approvals (7.4k) had worked up to their highest level since December 2022. The available estimates indicate the decline has been centred in the high-rise segment in Sydney and Melbourne. 

Detached or house approvals rose by 3.3% in April, posting their fastest increase in 13 months. This result lifted approvals to 9.5k, a 7-month high to be 4.3% higher across the year. However, these approvals are more than one-third below their cycle high from 2021, a peak that was boosted by pandemic stimulus after the RBA had cut rates to the lower bound and government measures supported housing construction. 

Preview: Australian Q1 GDP

Australia's March quarter National Accounts are out this morning (4/6). Growth in the domestic economy was soft in 2024 as consumer demand was well contained under cost-of-living pressure and earlier RBA rate hikes. Public sector spending and investment have underpinned growth and employment for more than a year, helping to offset weakness in private demand. These dynamics remained broadly in place in early 2025, while adverse weather events also weighed on growth. Estimates sit around 0.3-0.4% for GDP growth in the quarter.  

A recap: Domestic economy subdued, underpinned by public demand  

Quarterly growth picked up at its fastest pace in 2 years as real GDP expanded by 0.6% in the December quarter, lifting annual growth from 0.8% to 1.3%. Despite this, underlying momentum in the economy has been subdued as cost-of-living pressures and higher interest rates have weighed on consumption and investment. The main driver of growth has been public sector spending, including household support measures and defence and infrastructure investment.  

After contracting marginally in the prior two quarters, household consumption rebounded with a 0.4% rise in the December quarter, supported by discounting during the Black Friday sales. This drove goods consumption to its first quarterly increase (0.6%) in a year. Although declining in Q4 (-0.4%), dwelling investment picked up over the year (2.5%); however, the level of residential construction activity is flat since the RBA commenced its hiking cycle in Q2 2022. Business investment lifted by 0.5% in the quarter but stalled across 2024. Strength in IP and equipment have helped to offset weakness in non-residential construction. 

Q1 preview: Global uncertainty adds to headwinds 

Headwinds to growth from offshore intensified in early 2025 as impending tariffs from the US administration ramped up uncertainty around global trade. Quarterly growth across OECD economies slowed from 0.5% to 0.1% in the March quarter, its weakest outcome since the pandemic. Trade activity brought forward to front run tariffs had varying effects on growth at the country level; in the US, a surge of import orders swung GDP into contraction in the quarter (-0.1%), but growth picked up in the euro area (0.3%) and UK (0.7%) supported by exports bound for the US market. This also boosted growth in China, though it still slowed from 1.6% to 1.2% in the quarter as momentum in the domestic economy remained soft. 

In Australia, growth through the early months of the year looks to have remained subdued. The RBA provided some support to demand by commencing its easing cycle with a 25bps cut to the cash rate in February, with data later confirming inflation returned to its 2-3% target band in the March quarter. Consumer sentiment showed signs of improving following the rate cut, but it has been stuck at pessimistic levels for 3 years now. 

Economic activity in the March quarter was partly affected by adverse weather. Cyclone Alfred impacted south east Queensland and northern New South Wales in early March, while Cyclone Zelia in northern Western Australia disrupted resources shipments in mid-February.

Summary of key dynamics in Q1

Household consumption — Has been slow to respond to improving real incomes as inflation has cooled, and with the labour market remaining robust. The RBA's February rate cut and follow-up move in May will take time to help turn the tide. Retail sales volumes stalled in the quarter, pulling back after rising strongly last quarter (0.8%) due largely to Black Friday discounting.      

Dwelling investment — Looks set to rebound from a contraction in Q4, renewing its earlier momentum from 2024. Partial data indicated both new home building and alteration work advanced over Q1.  

Business investment — Momentum stalled over the course of last year and appears to have been weak in early 2025, with private sector capex recording a small decline in Q1. Business surveys have highlighted margin pressures and weak demand as key concerns, while elevated uncertainty has weighed on confidence.   

Public demand — Lost momentum in the quarter as government spending flatlined and investment softened, despite a large pipeline of activity. 

Inventories — A modest add of 0.1-0.2ppt to GDP looks likely. No noticeable volatility in the partial data that pointed to the effects of global trade uncertainty.   

Net exports — Aside from isolated examples (most notably non-monetary gold) frontrunning of the US administration's liberation day tariffs was not broadly evident in the trade data, unlike many other countries. Net exports to weigh modestly on GDP growth in Q1 (-0.1ppt). 

Australian retail sales slide in April

Australian retail sales posted their weakest result of the year sliding by 0.1% in April, a much weaker outcome than the 0.3% rise expected. Annual growth slowed from 4.3% to 3.8%. A strong rebound in sales in Queensland (1.4%) after Tropical Cyclone Alfred in March was unable to drive a rise in the national figure due to weakness in other major states. The timing of Easter and other public holidays that fell in April may have contributed to the weak result. At the category level, warmer weather weighed on clothing sales in April (-2.5%) while food sales normalised (-0.3%) after being boosted in March by stockpiling in Queensland ahead of TC Alfred. Weakness in spending by households in the absence of discounting keeps further RBA rate cuts on the table.  

After coming off a 0.3% rise in March, national retail sales declined by 0.1% in April to come in at $37.2bn. This was the weakest outcome since December last year, defying expectations to rise by 0.3%. Momentum in retail spending has been weak in 2025; sales growth over the 3 months to April averaged just 0.1% and was flat across the discretionary categories. Measures including the Stage 3 tax cuts, energy bill rebates and RBA rate cuts look to be staving off further weakness rather than boosting demand. 

The profile of sales in April showed the decline in turnover was driven by food (-0.3%), clothing and footwear (-2.5%) and department stores (-2.5%). The ABS noted in today's release that its liaison with retailers had identified warmer weather in April as delaying spending on winter clothing. Food sales do not often fall on a monthly basis, but the drop in April came after a strong increase in March (0.8%), a gain that was driven by a surge in supermarket spending in Queensland (1.8%) as households in the south east region stocked up ahead of TC Alfred. 

Some categories rose in April, helping to moderate the overall decline in retail sales. This included household goods (0.6%), dining out (1.1%) and other retailing (0.7%). A post-cyclone boost in Queensland helped drive the gains in the first two categories. 

Across the states, the rebound in Queensland (1.4%) came not only after the TC Alfred-affected decline in March (-0.4%) but also a weak outcome in February (-0.3%). The profile of monthly sales has been volatile in most states this year, except for Western Australia where sales have risen consistently - in fact sales in the west have only recorded one month-on-month decline in the past 16 months. Sales in New South Wales fell by 1% in April, a sharp drop but that looks to be more seasonally driven than anything, coinciding with the Easter period and other public holidays; the last time sales fell by a similar amount was March last year when Easter fell.  

Australian Capex -0.1% in Q1; 2024/25 investment plans $188bn

The slowdown in Australia's capex cycle has extended into 2025, with a weak report for the March quarter coming amid a backdrop of soft demand conditions and rising uncertainty on the eve of the announcement of trade tariffs by the US administration. Capex declined slightly by 0.1% in the March quarter, defying expectations for a 0.5% increase while year-ahead spending plans were upgraded modestly to $156bn. 

Today's capex survey provides a partial read on business investment ahead of next week's quarterly economic growth figures. Business investment supported growth from 2023 onwards but faded over the back half of last year. This looks to have continued in early 2025. 

Capex declined by 0.1% in the March quarter, contracting by 0.5% through the year. Offsetting movements were seen in both major segments: equipment investment (-1.3%) saw its largest decline since the pandemic while the buildings and structures component advanced (1.9%), broadly consistent with yesterday's construction work report (see here). Weakness in the non-mining sector (-0.9%) drove the overall decline in capex but was moderated by a rise (1.9%) in investment in the mining sector. 

In the non-mining sector, capex declined (-0.9%) due to a 2% fall in equipment investment, its weakest quarter since Q2 2020. Buildings and structures rose by a modest 0.4%. Over the year to Q1, non-mining capex contracted by 1.6%, swinging from a 7.6% pace 12 months ago. 

A 1.9% rise in mining sector capex was its strongest quarterly gain since Q3 2023. The level of capex investment made by the sector has remained fairly stable over the past couple of years. Both components rose: equipment up by 2.4% and buildings and structures lifting by 1.7%.  

Today's survey included firms' 6th estimate of capex plans for the current financial year, as well as their 2nd estimates of year-ahead plans for 2025/26. Estimate 6 was upgraded by 2.2% to $187.6bn, an increase in line with historical revisions. That upgrade was driven entirely by the non-mining sector (+3.3% to $132.9bn). This estimate puts capex on track to rise by 3.6% on the previous financial year.     

Firms were also surveyed for their 2nd estimates of capex spending in 2025/26. From an initial estimate of $147.6bn, capex plans rose to $155.9bn for estimate 2 - an upgrade of 5.6% but only 0.7% above where estimate 2 for 2024/25 came in. In a historical context, these are very minor upgrades for this stage of the estimates cycle, pointing to cautious firms amid the uncertain outlook. Mining sector plans were raised by 6% to $49.6bn and the non-mining sector saw a 5.4% upgrade to $106.3bn. 

Australian construction activity stalls in Q1

Australian construction sector activity stalled in the March quarter as the weakest outturn from the public sector in 3½ years offset an overdue acceleration from the private sector. Adverse weather events in Queensland and New South Wales during the quarter appear to have had only minimal impacts on construction work at the national level. 

In the March quarter, the volume of construction work done remained steady on the prior quarter, disappointing expectations for a 0.5% rise. Activity flatlined around offsetting movements: engineering work declined by 1%q/q - its first decline in a year - but building work lifted by 0.9%q/q, its strongest rise by a very narrow margin in two years. Construction work had advanced in each of the previous 3 quarters going into today's report, the 0.9% rise in the December quarter being the most recent gain in that run. Overall, construction activity rose at a modest 3.5% pace through the year to Q1.  

The weakness in the result for engineering work (-1%q/q) was driven by the public sector (-3.4%q/q), with the private sector recording a lift (1.2%q/q). Despite falling during Q1, public sector investment in infrastructure has ramped up significantly in recent years, and a large volume of work remains in the pipeline.  

It was a similar profile for building work, advancing overall by 0.9% in the quarter with the private sector driving growth (2%) as the public sector saw activity go backwards (-5.6%), posting its sharpest fall since Q3 2021. Strength in private sector building came largely from the residential segment, with the volume of work done rising to a 5-year high on the back of a 1.5% rise in Q1 (6.8%Y/Y). The sector looks to be regaining some momentum having come through significant headwinds of post-pandemic supply constraints and the RBA's tightening cycle in recent years. 

Non-residential work was broadly flat in Q1 (-0.1%), with a pullback in the public sector again weighing on growth from the private sector. Private non-residential work advanced by 3% for the quarter, its strongest result since Q4 2023. 

Australian CPI 2.4% in April

Australia's headline inflation rate held steady at 2.4% in April according to the ABS's monthly CPI gauge, slightly above the 2.3% expected figure. Decreasing inflation risks led the RBA to cut rates earlier this month, the second cut of its easing cycle as Governor Bullock indicated the rates board was prepared to reduce the cash rate further as required.

The monthly CPI gauge lifted by 0.8% in April, holding the annual pace steady at 2.4% for the third consecutive month. Prices in April increased by 0.7% in each of the past two years. Being the 'front' month for the more comprehensive quarterly CPI series, only a little over 60% of prices in the CPI basket were updated in April. The main movement came in electricity prices, rising by 1.5% in April as government rebates continued to unwind. 

Electricity prices are still 9.6% lower than a year ago, reflecting the effect of the rebates from state and federal governments. Without those, the ABS estimates electricity prices would have risen by 1.5% over the year. In other goods categories, clothing and footwear prices ticked up from 0.7% to 0.8%yr but inflation pressures from food (3.1%yr) and fuel (-12%) eased. 

Overall, goods inflation firmed from 0.9% to 1.2%yr. Services inflation also lifted slightly from 3.9% to 4.1%yr, albeit rising on limited price updates. In the quarterly CPI series, services inflation showed encouraging progress slowing to 3.7%yr in the March quarter, its weakest pace since Q2 2022.   

  

The various measures of core inflation lifted in April but remained below the top of the 2-3% target band. CPI on a trimmed mean basis firmed from 2.7% to 2.8%yr while CPI excluding 'volatile items' was 2.9% from a prior reading of 2.7%; if holiday travel is also removed, inflation ticked up from 2.6% to 2.7%yr.  

Macro (Re)view (23/5) | Calm halted

The relative period of calm that allowed equity markets to rally off April's lows was halted this week as President Trump threatened a 50% tariff on the European Union and concerns over US deficits remained prominent. Trump cited a lack of progress in talks with the EU in announcing plans to impose the new tariff from June 1. Meanwhile, Trump's bill to fund the extension of tax cuts by reducing spending in safety net programs was narrowly voted through the house and now heads to the senate. The bill is estimated by the Congressional Budget Office to increase US debt by over $2tn over the next decade, reflecting the concerns that prompted the ratings downgrade from Moody's last week. Term premium - the additional compensation investors require to hold long-term debt securities - has been all the talk this week as yield curves steepened, a headwind for equity markets as higher discount rates put downward pressure on company valuations. The US dollar saw renewed weakness to be 4.5% below its early April levels prior to Trump's tariff announcements.    

The second 25bps cut of the RBA's easing cycle lowered the cash rate to 3.85% this week. In contrast to the hawkish messaging that accompanied the previous rate cut in February, the RBA has subsequently turned more dovish as Governor Bullock revealed in the post-meeting press conference that the Board discussed the case for a larger 50bps cut. Market pricing is shifting towards factoring in 3 further rate cuts this year, reducing the cash rate to 3.1% by year-end. With inflation returning to the 2-3% target band in the March quarter, the RBA's latest forecasts in the May Statement on Monetary Policy highlighted downside risks to the outlook for both growth and inflation in Australia stemming from the tariff war. More on this week's RBA meeting can be found in my review here. 

Markets continue to reassess the outlook for the Bank of England's easing cycle. Data this week showed inflation rose more sharply than expected in April, arguably giving more impact to the hawkish elements at the last BoE meeting that surprised markets. A shallower market curve that prices in between 1 to 2 further rate cuts by year-end reflects these factors, implying less confidence the BoE will continue with its sequence of quarterly rate cuts. 

UK inflation was expected to pick up in April due to seasonality and increases in household utilities costs, but headline CPI rose from 2.6% to 3.5%yr to exceed the expected figure of 3.3%. Additionally, core CPI lifted from 3.4% to 3.8%yr, above expectations for 3.6% as services prices - the key area of the basket under the BoE's scrutiny - pushed up from 4.7% to 5.4%yr. Inflation was skewed higher in April by Easter holiday prices rises, higher utility costs and an increase in road tax, factors the BoE took into account in its decision to cut rates earlier this month. Still, the report adds to the uncertainty around the inflation outlook that is already significantly clouded by the tariff war.  

In Europe, the threat of a 50% tariff on its exports bound for the US market has only amplified expectations for ECB rate cuts. Market pricing has increased to three 25bps rate cuts over the remainder of the year from two cuts at the start of the week. Even prior to Trump's tariff threat the account of the ECB's previous meeting in April pointed to the continuation of rate cuts with rising confidence that inflation was increasingly under control. Wage pressures also showed a notable cooling to a 2.4% annual pace in Q1, well down from 4.1% previously. Some slippage in the PMI readings in May indicated growth in the bloc was stalling due to tariff uncertainty. 

RBA cuts cash rate 25bps in May

A dovish tone to the RBA's decision to lower the cash rate by 25bps to 3.85% has pushed market pricing for further easing by year-end from 2 cuts going into today's meeting towards a third cut. Today's cut makes the cash rate 'somewhat less restrictive' according to the Board, a follow-up move from the first cut of the easing cycle in February. But with updated forecasts showing the recent return of inflation to the 2-3% target band is expected to be sustained, risks associated with the tariff war have prompted a more supportive stance from the RBA. The main surprise from Governor Bullock's post-meeting press conference was that the Board discussed a larger 50bps cut but unanimously settled on the expected 25bps move. 

Today's dovish cut is in contrast with the hawkish messaging that accompanied the February cut as the Board started to lower the cash rate from its cycle peak of 4.35%. Back then, Governor Bullock actively pushed back on market pricing for a year-end cash rate at 3.6%. It was a very different message today; inflation risks have diminished; cautious households have not been spending as expected with real incomes picking up; and risks from offshore have elevated due to global trade being upended by tariffs. To underline that last point, mentions of 'uncertainty' in the latest Statement on Monetary Policy increased by more than 140% on February's edition.

Regarding global trade, Governor Bullock said the RBA sees the tariff war as posing disinflationary risks. Amid the backdrop of tariffs reducing trade and weakening demand, the domestic growth outlook in the RBA's updated forecasts was revised down to 2.1% this year (from 2.4%) and 2.2% next year (from 2.3%). As a result, the unemployment rate forecasts were nudged up to 4.3% from 4.2% in both years. Importantly, confidence in the inflation outlook has risen since the easing cycle commenced. The latest view is that inflation (both on a headline and core basis) will hold in the target band across the projection horizon out to mid 2027. These forecasts are predicated on the market curve for RBA rates ahead of today's meeting.   

Aside from the baseline outlook, the decision statement noted that the Board considered a scenario with more severe effects on the Australian economy from the tariff fallout. The placement of that detail was to point out that the RBA has the policy firepower to respond. Going forward the statement reiterated the Board retains a data dependent stance and it will be continually assessing the risks to growth and inflation. The next RBA monetary policy meeting is on 7-8 July.