Source Credit : Portfolio Prints
Australia's economy lost momentum in the first quarter as weak household spending, softer government consumption, and severe weather-related disruptions to mining activity and exports weighed on growth.
Gross domestic product expanded 2.5% in the January–March period from a year earlier, according to data released Wednesday by the Australian Bureau of Statistics. The result fell short of economists' expectations for 2.6% growth and marked a slight slowdown from the 2.6% annual expansion recorded in the previous quarter.
On a quarterly basis, the economy grew 0.3%, undershooting the 0.5% increase forecast in a Reuters poll and slowing sharply from the 0.8% growth rate seen in the final quarter of last year.
Despite the softer headline figures, investment remained a bright spot. The statistics bureau said strong spending on machinery and equipment, particularly for data centers and digital infrastructure, helped support economic activity during the quarter.
Australia's economy entered 2025 with considerable momentum after recording its strongest quarterly growth in nearly three years at the end of 2024. That resilience, combined with persistent inflationary pressures, prompted the Reserve Bank of Australia (RBA) to become the first major developed-market central bank to tighten monetary policy this year.
The RBA delivered its third interest-rate increase of 2025 in May, lifting the cash-rate target by 25 basis points to 4.35%, as policymakers sought to contain renewed inflation risks amid a surprisingly resilient economy.
Financial markets reacted modestly to Wednesday's data. Australia's 10-year government bond yield edged higher to 4.898%, according to LSEG data, extending gains of roughly 24 basis points since the outbreak of the Iran conflict on Feb. 28. Meanwhile, the benchmark S&P/ASX 200 rose 0.5%, while the Australian dollar was little changed at 0.7176 against the U.S. dollar.
Looking ahead, Australia's economic outlook has become increasingly clouded by the escalating conflict in the Middle East. The disruption of oil shipments through the Strait of Hormuz has driven a sharp rise in global energy and commodity prices, adding a new source of uncertainty for businesses and consumers worldwide.
Although Australia is a major energy exporter and could benefit from higher commodity prices in the short term, persistently elevated energy costs risk squeezing household budgets and weakening consumer demand over time.
Nick Stenner, economist for Australia and New Zealand at Bank of America, said the first-quarter figures are likely too early to reflect any meaningful economic impact from the conflict. Instead, the effects are expected to become more apparent in the second quarter as higher energy costs filter through the economy.
According to Stenner, the Reserve Bank is likely to remain focused on underlying private-sector demand, while also monitoring inflation risks linked to weak productivity growth and rising unit labor costs. He expects household consumption to soften further in the coming months.
The central bank itself has adopted a more cautious outlook. In its May policy statement, the RBA projected that Australia's economic growth would slow to 1.3% by the end of the year, underscoring concerns that higher interest rates, weaker consumer spending, and mounting global uncertainties could weigh on the economy throughout 2025.
