GDP growth slide makes interest rate cuts likely

Jim Chalmers’s hopes for a private sector-led economic recovery have been dampened by weak business investment, zero productivity and low economic growth, putting more pressure on the Reserve Bank to cut interest rates.

Treasurer Jim Chalmers in Canberra on Wednesday. Picture: NewsWire / Martin Ollman

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Jim Chalmers’s hopes for a private sector-led economic recovery have been dampened by weak business investment, zero productivity and low economic growth, putting more pressure on the Reserve Bank to cut interest rates at its next meeting in July, before conditions deteriorate ­further under global trade un­certainty.

While the Treasurer claimed a “gradual” recovery was now taking place, despite recent weather events hitting economic activity, economists said the “disappointing” 0.2 per cent growth in the March quarter, down from 0.6 per cent in December, showed con­ditions had weakened before the Trump administration's Liberation Day tariffs shockwave, and even greater challenges lay ahead.

Dr Chalmers said the economy would have shrunk in the first three months of the year had it not been for the private sector, where household consumption rose 0.4 per cent as people spent more on utility bills after energy rebates rolled off, and interest rate cuts and higher real incomes per capita helped lift expenditure.

“While overall growth in the Australian economy remains subdued, the private sector recovery we have planned and prepared for is gradually taking hold,” he said.

“Growth is softer than we would like it to be. I’m confident growth will accelerate in our economy.”

Two interest rate cuts, which he said he expected would add some $10bn to household and $6bn to business balance sheets over the year, would help fire up the private sector recovery, despite a growth downgrade from the OECD this year.

“There’s a little bit of that captured in these March national accounts but, overwhelmingly, the benefit of those two interest rate cuts will be captured into subsequent quarters,” he said.

Ahead of a call with his Canadian counterpart on Thursday, Dr Chalmers said there were still significant headwinds ahead for the economy that would also put further strain on growing budget deficits. “It’s self-evident that the pressures on our budget are intensifying rather than easing,” he said.

Financial markets priced in an 84 per cent chance of the Reserve Bank cutting interest rates in July by 0.25 percentage points, up from a 74 per cent chance on Tuesday.

Goldman Sachs chief economist Andrew Boak said the economic momentum “looks to have faltered”, raising downside risks to the RBA’s forecast for a private sector, consumer recovery this year, especially as public spending dropped away.

“We see a strong case for the RBA to cut 25bp at the next opportunity in July,” Mr Boak said.

“Given the budgeted slowing in spending on aged care and the NDIS will continue to erode the tailwind to growth from the public sector, a substantial easing cycle will be required to spur a sustainable rotation of growth into private demand.”

IFM chief economist Alex Joiner said the “little contribution” made from business investment, which grew just 0.7 per cent after a -1.7 per cent drop in machinery and equipment, was stalling and “uncertainty internationally will weigh in the coming quarters”.

ANZ chief economist Adam Boyton, who predicted the 0.2 per cent growth rate, said the result was not an accurate reflection of the economy, the RBA would not need to cut rates in July and weak business investment and a drop off in public spending were not trends.

“We don’t think the fall in public demand that pulled growth down in the first quarter marks the start of a new trend. Hence, we don’t think today’s release will push the RBA to a July rate cut,” Mr Boyton said.

For the RBA, the new figures were below expectations for GDP growth to hit 1.6 per cent in the 12 months to March, instead coming in at 1.3 per cent.

Rate cuts have already started pushing up property prices, with Cotality’s national Home Value Index rising another 0.5 per cent in May, taking the national index 1.7 per cent higher over the first five months of the year.

While the rate cuts are expected to lead to higher consumption, EY chief economist Cherelle Murphy said there were bigger issues around longer term structural problems with the economy, including productivity, which showed no recovery in the quarter. “Beyond highlighting a need for monetary assistance, the nat­ional accounts also show longer term structural issues in the economy,” Ms Murphy said.

“Productivity growth was flat in the quarter and down over the year, and there is no evidence that Australia is making any progress in shifting the problem,” she said.

Dr Chalmers, who has said productivity would be the key priority this term, acknowledged on Wednesday that it was “clear our economy is not productive enough.”

“We are well prepared to deal with what is coming at us from around the world at the same time as we do what we can to make our economy more productive and budget more sustainable over time.”

Credit rating agency S&P has said there were risks to Australia’s AAA credit rating because of the erosion of fiscal prudence.

S&P said big-spending promises by Labor and the Coalition had to be accompanied by savings and new revenue measures to avoid a blowout in budget deficits.

The OECD this week said while state and federal government deficits this financial year were acceptable, governments had to start saving future revenue windfalls.

“The widening of the fiscal deficit in 2024-25 and the further budgeted increase in 2025-26 are justifiable, given the weakness of private demand, but governments should look to save any windfalls relative to current plans,” it said.

Opposition Treasury spokesman Ted O’Brien focused on per capita GDP falling again in the March quarter – the eighth decline over the past nine quarters. “The Treasurer can paint whatever rosy picture he wants, but the numbers don’t lie. Australia’s economy is in a dark place without a light at the end of the tunnel,” he said.

Private demand, which includes both consumption and business investment, led the contributions to growth in the quarter with household consumption adding 0.2 percentage points to GDP and private investment 0.1 percentage points.

The public sector and net exports detracted 0.1 percentage points from GDP growth.