GDP growth was weaker than expected in the March quarter, coming in at just 0.2% with annual growth at 1.3%. While these figures pre-date President Trump’s fast and furious announcements on tariffs, they highlight that even before that shock to global growth, the Australian economy was limping along slowly. But it’s not all bad news.

Notably, growth has rebalanced with stronger private demand offsetting a pull-back in public spending. Household consumption and dwelling investment combined contributed 0.3% points to growth in the quarter, while public spending subtracted 0.1% points from growth. With no sharp redress planned for the structural fiscal deficit, Government spending is likely to resume moderate growth.

While weather disruptions was a factor in the fall in exports, weakness in international student numbers also contributed, highlighting the self-inflicted element of the current upending in global trade. 
 

More good news is that lower interest rates and inflation, alongside continued employment growth, saw further increases in real household disposable incomes. This enabled households to increase their saving rate to around its historical average, along with modestly increasing their consumption spending. 

Unfortunately there was some less encouraging news with no growth in productivity and GDP per capita slipping backwards. GDP per capita had increased in the December quarter, but calling the end of the GDP per capita recession was premature. With this further fall, this important measure of living standards is now 1.5% below its peak.

Through the pandemic, measurement of productivity growth was significantly impacted by sharp changes in the number of hours worked, and GDP growth. Hours worked have returned to their previous trend, but GDP is limping along, unable to match the pre-pandemic growth. The Government is right to focus on productivity growth in its second term, it is the most pressing issue for the Australian economy and living standards. 

While weak GDP growth could tilt the RBA to cutting interest rates sooner, the weakness in productivity growth should be a break on faster cuts. Growth in wages, and so overall labour costs, has slowed to levels that have historically been consistent with inflation being at the RBA’s 2.5% target. However, with productivity falling over the past year, and no cumulative growth for over five years, the still too-high growth in unit labour costs – i.e. adjusted for changes in productivity – remains too high. This will weaken the RBA’s confidence that inflation is slowing sustainably. On balance, cutting cautiously still seems to be the order of the day. 

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