Australia’s economy grew at an annual rate of 2.5 per cent in the March quarter, the same as in the previous quarter.
But on a quarterly basis, the economy grew by just 0.3 per cent, which was much weaker than the 0.9 per cent recorded in the previous quarter.
The rapid slowdown in the quarterly rate of growth coincided with the Reserve Bank’s decision to lift interest rates in February and March.
The RBA has forecast the economy to expand by 1.9 per cent over the year to June, so it is expecting a further weakening of the economy in coming months.
Grace Kim, ABS head of National Accounts, said modest household and public sector expenditure, as well as cyclone disruptions to mining and export activities, contributed to the slowdown in activity.
“Rising interest rates and significantly higher fuel costs in the March quarter likely created an environment for more cautious consumer behaviour,” she said.
“This resulted in reduced spending across a range of household expenditure categories.”
Earlier this week, Westpac’s economics team said Australia’s economy was already slowing before the conflict in the Middle East, or the RBA’s rate hikes in February, March and May, had really started to impact.
“The significant headwinds from the conflict will be more fully reflected in the second quarter of 2026, with the possibility of a quarterly contraction which would be the first quarterly decline since the GFC (excluding COVID),” they warned.
RBA governor had warned of rough times ahead
Last month, RBA governor Michele Bullock warned that Australia was “staring down the barrel” of a very rough time in coming months as inflation rose, the economy slowed and unemployment slowly picked up.
She also said that the RBA’s three recent rate hikes were not going to do anything for inflation in the next six months, given the lag time in how monetary policy works.
Economists had also predicted that the collapse in business and consumer confidence in recent months, in response to the war in the Middle East and the global surge in inflation, could hit Australia’s economic activity in a big way.
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In the RBA’s latest statement on monetary policy, RBA staff forecast Australia’s annual rate of economic growth to slow to just 1.3 per cent by the end of this year.
Today, the head of economic research for Oxford Economics Australia, Harry Murphy Cruise, said economic activity would likely weaken further from here.
“Surging inflation, sky-high oil prices and shattered confidence will collide to crimp spending through the rest of the year,” he said.
“We expect per capita household spending to be broadly flat in 2026, while softer hiring will push unemployment close to 5 per cent through 2027.”
Data centres and defence spending
In the March quarter, business investment in data centres was the largest contributor to growth, but since the majority of the capital assets were imported the impact on GDP growth was moderated by a large detraction from net trade.
Private investment grew 3.6 per cent. It was led by machinery and equipment (+16.3 per cent) with increased business investment in data centres across New South Wales and Victoria.
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Public investment grew 0.9 per cent. Defence investment rose 6.8 per cent reflecting increased imports of defence weapons platforms.
Construction contributed to the rise with higher activity across residential construction services, apartment projects and data centre fit-outs.
Manufacturing rose with heightened demand for fertilisers and pesticides from farms.
Mining was the largest detractor as coal production was negatively impacted by Cyclone Koji.
Consumer-facing service industries including retail trade, accommodation and food services, and arts and recreation services recorded weakness with subdued household spending on discretionary goods and services.