By Stella Qiu and Wayne Cole
SYDNEY (Reuters) -Australia’s economy barely grew in the first quarter as consumers stayed stubbornly frugal and government spending, the engine of activity last year, sputtered to a standstill, underlining the need for more policy stimulus.
The Reserve Bank of Australia has already cut interest rates twice since February to 3.85% and the minutes of the May policy meeting showed that it was open to an outsized half-point move as U.S. tariffs darkened the outlook for the global economy.
“While it’s still too soon to know for sure, early signs point to an even larger drag from confidence on consumption and investment in Q2,” said Ben Udy, lead economist for Oxford Economics Australia.
“The RBA will be watching closely for further signs that the weakness in activity in Q1 extends into Q2 – if that evidence continues to rack up, the RBA may opt to cut rates again in July.”
Real gross domestic product (GDP) rose 0.2% in the March quarter, Australian Bureau of Statistics data showed on Wednesday, missing market forecasts of 0.4%.
Annual growth flatlined at 1.3%, when analysts had looked for a pick-up to 1.5%, and remained well short of the 2.5% pace that used to be considered “normal”.
The subdued result has been partly priced in after the weak partial GDP data on Tuesday. Swaps imply an 80% probability of a rate cut in July, with a total easing of almost 100 bps priced in to a bottom of 2.85% by early next year.
“Extreme weather events reduced domestic final demand and exports. Weather impacts were particularly evident in mining, tourism and shipping,” said Katherine Keenan, ABS head of national accounts.
The report showed the household savings ratio jumped to 5.2%, the highest since third quarter 2022, as consumers chose to save rather than spend. That is partly why household consumption edged up a tepid 0.4% in the quarter, adding just 0.2 percentage points to GDP growth despite lower borrowing costs and cooling inflation.
In particular, government spending, which has single-handedly lifted economic growth over the past year, has disappointed to make the largest drag on growth since 2017.
Measures of inflation in the report showed a continued moderation with the deflator for domestic demand slowing to an annual 3.3% from 3.5% in the fourth quarter.
Australia’s disappointing track record on productivity was proving slow to turn around with output per hour flat in the quarter and down 1% for the year.
(Reporting by Stella Qiu and Wayne Cole; Editing by Jacqueline Wong)
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