Is the RBA a glass-half-full type of place? Its next rate decision will tell us

The hopes of home buyers and businesses for further interest rate relief depend on whether the Reserve Bank takes a glass half full or a glass half empty view of the latest snapshot of the state of the economy.

The March quarter national accounts released by the Australian Bureau of Statistics on Wednesday revealed the country’s economic growth had slowed to 0.2 per cent in the first three months of the year. At the annual rate, it was just 1.3 per cent.

Reserve Bank governor Michele Bullock.Credit: Louie Douvis

By any measure, the numbers were disappointing if not completely unexpected. Flooding, Cyclone Alfred and another natural disaster – the first two months of the Trump administration – all meant the March quarter was going to be a struggle.

At face value, that would seem to strengthen the RBA’s case for a rate cut in July after it revealed that it went close to a 0.5 percentage point reduction at its late May meeting.

Household spending, while up, is still subdued. Part of the improvement was due to people losing some of their energy supplements, forcing them to spend more on their electricity bills.

Businesses wound back expenditure on plant and equipment. Productivity remains extremely poor. GDP per person, which grew for the first time in almost three years in the December quarter, went backwards in the March quarter.

Household saving lifted to its highest level in almost three years. Some of that was due to the impact of natural disasters, which prevented people from spending, but some of it is due to consumer uncertainty (thanks in part to Trump).

Even the good news in the figures was a little wobbly. The fastest growing part of the economy right now is the farm sector, but that’s partly because producers are offloading livestock due to dry conditions across the nation’s south-east.

All this took place before Trump stood up in the White House rose garden on “liberation day”. The RBA has subsequently worked out that if the President follows through with his grand tariff plans, he’ll not only plunge the US into recession but just about every other nation on the planet.

As EY chief economist Cherelle Murphy noted, if the Reserve had known how bad the economy would open the year, it would have started cutting rates earlier.

“The economy needs much more monetary easing, especially now the threat of inflation is easing and the Trump Administration’s initial policy impact on the global economy has not even fully shown up in the economic data,” she said.

But there’s another side to the figures.

Dwelling investment lifted by 2.6 per cent as construction got underway on new homes and renovations. Businesses also increased their construction expenditure, led by miners and energy suppliers (although they trimmed spending on plant and equipment).

The floods and cyclones – though not cyclone Trump – hit the mining, hospitality and tourism sectors. But these sectors will recover from these.

The Reserve Bank delivered a rate cut in mid-February, but it only started filtering through to businesses and home buyers in early March. We don’t really know the impact of that cut, let alone the one delivered in May.

Investment by the public sector, which has propped up the economy for the best part of three years, went backwards by two per cent. Major projects, such as Sydney’s new Metro system, are up and running, while Melbourne’s own Metro will be operational later this year.

Weaning the country off public works, freeing up materials and people for the private sector, is what the economy needs.

Treasurer Jim Chalmers, speaking in Canberra after the release of the figures, said the private sector was now doing the “heavy lifting” in the country’s economic growth.

“The private sector is stepping up now as the public sector takes a step back,” he said. “All of the growth in the March quarter was from the private sector.”

As ANZ’s head of Australian economics Adam Boyton noted, the economy is in better nick than the 0.2 per cent suggests.

“Household income dynamics are showing an improvement, and we don’t think the fall in public demand that pulled growth down in the March quarter marks the start of a new trend. We don’t think today’s release will push the RBA to a July rate cut,” he said.

Ahead of the figures, financial markets already put the chance of a July rate cut at better than four-in-five. That ticked up in the wake of the numbers with expectations high the Reserve will follow the July cut with another in August.

Whether the bank goes into that July meeting agreed on a further rate cut will now depend on how much milk is in the Reserve’s glass.

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