Australia's economy slowed in the March quarter as strength in business investment was offset by a drag from trade, data showed on Wednesday, while higher borrowing costs and rising petrol prices cooled consumer demand.
The pullback is likely to worsen as the Middle East conflict and rapid-fire policy tightening have sent household spending falling, house prices flatlining and the unemployment rate edging higher.
"The headline was soft, and the composition was even uglier," said Sunny Nguyen, head of Australia economics at Moody’s Analytics.
"Public demand failed to cushion the economy, cyclone-disrupted exports turned net trade into a heavy drag, and discretionary spending stalled as the squeeze on households started to bite."
Real gross domestic product (GDP) rose 0.3% in the first quarter, easing from a 0.9% jump the previous quarter, data from the Australian Bureau of Statistics showed. Market forecasts were for 0.5%, but with downside risks.
Annual growth held steady at 2.5%. The Reserve Bank of Australia judges the economy cannot grow much above 2.0% without generating inflation, leading it to raise rates three times so far this year to 4.35%.
The slowdown was partly due to record imports of automatic data processing equipment for data centers, with net trade subtracting 0.8 percentage points from GDP growth. Exports fell by 1.1%, the largest quarterly decline in two years as weather conditions disrupted shipments of coal and iron ore.
The mixed first-quarter data failed to move the dial on policy outlook. The RBA expected the economy to slow further to an annual growth of 1.9% by the second quarter and to 1.3% by the end of the year.
The Australian dollar was flat at $0.7178 and three-year government bond futures held earlier losses at 95.44.
Swap markets currently imply a 7% chance of a fourth rate hike from the RBA this month, while a move in August is seen as a coin toss. For the rest of the year, there is a total of 23 basis points of tightening priced in.
Business investment booms
For the quarter, business investment in data centre machinery and equipment was the largest contributor to growth. Investment in machinery and equipment surged 16.3% in the quarter, the largest in 30 years, and added 0.7 percentage points to growth.
Domestic final demand contributed a whopping 1 point to GDP growth.
"We're seeing a boom in private investment and that's a good thing," said Treasurer Jim Chalmers in a press conference.
"In time by seeing these investment figures flow through into our economy, that will be an important part of shifting what has been a couple of decades now of poor performance on productivity."
By contrast, public demand contributed little to growth. Household consumption added 0.3 percentage points as consumers paid more for electricity, gas and other fuel amid higher energy costs from the Iran war. Discretionary spending was subdued, up just 0.1%.
Tougher times lie ahead, with household consumption already falling 1.1% in April, a record run in house prices grinding to a halt and the unemployment rate ticking up to a 4-1/2-year high of 4.5% in April.
"Australia is still growing, but the quality of growth has deteriorated," said Stephen Smith, partner at Deloitte Access Economics.
"The outlook now depends on whether investment broadens beyond a handful of large projects, households regain real spending power, and external geopolitical headwinds begin to ease."
(Reporting by Stella Qiu and Wayne Cole; Editing by Himani Sarkar, Jacqueline Wong and Muralikumar Anantharaman)
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