Sequential GDP growth grinds to a crawl in Q1

Weak consumer confidence and extreme weather drive softer-than-expected print:

The economy started the year with an unpleasant jolt, with GDP growth coming in at 0.2% on a seasonally adjusted quarter-on-quarter basis in the first quarter. The reading was notably below Q4 2024’s two-year high of 0.6%, fell short of the expectations of markets and the Reserve Bank of Australia (RBA) and was among the weakest in the post-pandemic era.

On an annual basis, economic growth was unchanged at Q4 2024’s 1.3% in Q1, likewise surprising markets to the downside.

Economy posts slowdowns across the board:

Domestically, consumer and business sentiment remained weak due to a rise in global trade uncertainty, plus a cyclone in March causing floods, power outages and crop damage. This outweighed tailwinds from the fastest increase in real wages in five years and the start of the RBA’s easing cycle. In particular, growth of private consumption, which accounts for around half of GDP, decelerated to 0.4% in the first quarter from 0.7% in the prior quarter, with the household savings ratio climbing to a two-and-a-half-year high of 5.2% (Q4 2024: +3.8% qoq s.a.). Moreover, fixed investment growth slowed to 0.1% in Q1 compared to 0.7% logged in the previous quarter. Meanwhile, public spending, which had been a major contributor to GDP growth over the past two years, screeched to a halt (Q4 2024: +0.6% qoq s.a.).

On the external front, exports of goods and services shrank 0.8% in the first quarter (Q4 2024: +0.1% qoq s.a.), marking the steepest decline in over a year largely due to weather-related factors. Meanwhile, imports of goods and services swung into contraction, falling 0.4% in Q1 (Q4 2024: +0.7% qoq s.a.).

Recovering purchasing power to lift GDP ahead:

Our panelists expect sequential GDP growth to pick up in Q2 as the economy recovers from weather-related weakness, the RBA loosens monetary policy further and households tap into their savings, benefitting from healthy real wage growth and income tax cuts. Economic growth should then stabilize through Q4, improving in 2025 as a whole from 2024, which had marked the worst result since 1991 barring 2020’s pandemic-induced downturn.

Panelist insight:

Analysts at the EIU commented:

“As the RBA continues its rate-cutting cycle, households will feel a benefit from lower borrowing and debt-repayments costs (especially as the country’s commercial banks pass these rate reductions on immediately and in full). The combination of demand for labour and more moderate inflation will maintain real wage growth, while the mandate delivered to the Labor government by voters at the May election will encourage further public spending. We believe that the economic damage from US tariffs will be minimal.”

United Overseas Bank’s Sue Ann Lee was more downbeat:

“Tariff announcements from the US since 2 Apr have led to significant downside risks both globally and domestically. The direct impact from Australia’s bilateral trade with the US is expected, in aggregate, to be limited. [However,] ongoing uncertainty in relation to the ongoing trade war will likely have negative implications for consumption and business investment in Australia. As such, we have slightly revised lower our economic growth forecast for Australia.”