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July rate cut back in play as GDP misses forecasts
Subdued GDP figures have bolstered expectations that the RBA could cut rates sooner, and possibly more aggressively, market watchers say.
Australia’s gross domestic product (GDP) grew by 0.2 per cent in the March quarter and 1.3 per cent year-on-year, according to figures released by the Australian Bureau of Statistics (ABS) on Wednesday.
The print was below expectations of a 0.4 per cent quarterly rise.
“Economic growth was soft in the March quarter,” said Katherine Keenan, ABS head of national accounts.
“Public spending recorded the largest detraction from growth since the September quarter 2017. Extreme weather events reduced domestic final demand and exports. Weather impacts were particularly evident in mining, tourism and shipping”.
GDP per capita fell 0.2 per cent this quarter, following a 0.1 per cent rise in the December 2024 quarter.
ABS data showed government spending remained flat, with no growth in final consumption expenditure in the March quarter.
Household spending was up 0.4 per cent in the March quarter following a revised 0.7 per cent rise in the December quarter.
“Growth was relatively slow across most household spending categories following stronger-than-usual spending during the December quarter’s retail sales events,” Keenan said.
Private investment rose 0.7 per cent in the March quarter led by investment in dwellings, new buildings and new engineering construction, while public investment fell 2.0 per cent.
Net trade detracted 0.1 per cent from growth in the March quarter, with coal and LNG exports heavily impacted by severe weather disruptions to production and shipping.
Exports of travel services also detracted from growth with a smaller-than-average rise in the number of international students in Australia during the quarter and reduced average spending of students.
Moreover, imports of goods also fell, driven by a range of capital goods.
More cuts now on the cards
In response to the print, Krishna Bhimavarapu, APAC economist at State Street Global Advisors, said: “Today’s GDP growth data came in below our low bar … it’s three times slower than what we pencilled in March.
“This changes the fundamental approach to the Australian economy as the RBA may ease faster and potentially by larger magnitude when they meet next. Either way, the data settles the debate that the cash rate remained restrictive for longer than perhaps needed and that growth is affected as a result.”
Similarly, Oxford Economics said the RBA will closely monitor whether the Q1 slowdown persists into Q2, warning that continued weakness could prompt an earlier-than-expected rate cut as soon as July, ahead of current forecasts.
“While there was some evidence that weaker sentiment and concerns around the global outlook were weighing on GDP growth in Q1, global uncertainty has only ramped up since then. Early data suggest this may have translated into an even larger drag on consumption and investment in Q2,” Ben Udy, lead economist, said.
Economist Diana Mousina also confirmed AMP has now tweaked its RBA forecast and expects another rate cut in July, which would take rates to 2.85 per cent at the end of the cutting cycle.
“Our view is that domestic conditions are going to slowly improve in the next 12–18 months with GDP growth up by 1.6 per cent over the year to December and 2.2 per cent by mid-2026. The RBA was expecting GDP growth of 2.1 per cent by year-end. But in the environment of uncertain global trade policy and heightened consumer and business concern, it’s hard to see a fast turnaround in GDP growth,” Mousina said.
“This gloomy growth outlook argues for more interest rate relief from the RBA, as the economy is travelling slower than expected. We had been expecting another 0.25 per cent rate cut at the August, November and February board meetings but now expect another 0.25 per cent cut in July.”
VanEck senior portfolio manager Cameron McCormack said the data confirms Australia’s economic growth has stalled.
He said the export figures, while backward-looking, highlight ongoing challenges for Australia’s miners amid subdued Chinese demand and severe weather impacts, but noted the surprising surge in gold exports to the US may reflect growing investor concerns over the US dollar and Treasury markets amid global trade uncertainties.
Ultimately, McCormack said: “Notwithstanding an increase in defence spending by the federal government, a large detraction in public spending overall has materially impacted the GDP.”
ANZ for its part said it thinks the economy is in better shape than the data would suggest.
“Household income dynamics are showing an improvement, and we don’t think the fall in public demand that pulled growth down in Q1 marks the start of a new trend,” said Adam Boyton, head of Australian economics.
“Hence, we don’t think today’s release will push the RBA to a July rate cut.”
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