Australia's economy experienced slower-than-anticipated growth in the first quarter of 2025, according to data released by the Australian Bureau of Statistics (ABS). The economy expanded by 1.3% year-on-year, falling short of the 1.5% growth forecast in a Reuters poll and remaining unchanged from the previous quarter's annual growth rate. On a quarter-on-quarter basis, GDP increased by a mere 0.2%, below the expected 0.4%. This subdued performance has raised questions about the nation's economic resilience amidst global uncertainties.

Katherine Keenan, ABS head of national accounts, attributed the soft growth to several factors, including shrinking public spending, weakened consumer demand, and a decline in exports. Extreme weather events, such as flooding and Cyclone Alfred, significantly impacted domestic final demand and exports, particularly affecting the mining, tourism, and shipping sectors. Official data indicated that public demand and net trade each subtracted 0.1 percentage point from the quarterly GDP, while private demand provided a 0.3 percentage point boost. The initial period of the Trump administration also contributed to the economic struggle during the March quarter.

Household spending, while showing a slight increase, remained subdued, partly due to households allocating more funds to higher electricity bills following the loss of energy supplements. Businesses also demonstrated caution, winding back expenditure on plant and equipment. Productivity levels remained alarmingly poor, and GDP per person, which had seen a brief recovery in the December quarter, declined once again. Concurrently, household savings rose to their highest level in nearly three years, a trend influenced by natural disasters preventing spending and increased consumer uncertainty, partly fueled by the global political climate, including actions from the Trump administration.

In response to the economic conditions and receding inflation concerns, the Reserve Bank of Australia (RBA) slashed interest rates to 3.85% in May, its lowest level in two years. This move aimed to bolster growth and counter rising global trade risks. Minutes from the RBA's May meeting revealed that the board had considered a more aggressive 50 basis point cut, citing "much higher than expected" tariffs by the Trump administration and "highly unpredictable" tariff decisions. Australian consumer inflation eased to a four-year low of 2.4% in the first quarter of 2025, falling within the RBA's 2% to 3% target range, with April's monthly inflation also holding steady at 2.4% year-on-year. The RBA expressed expectations for domestic GDP growth to pick up later in 2025, driven by a consumption recovery and continued public demand, though weaker export demand could pose a challenge.

Sector-specific performance presented a mixed picture. The farm sector emerged as the fastest-growing part of the economy, though this was partly due to producers offloading livestock in response to dry conditions across the nation's south-east. Positively, dwelling investment rose by 2.6% as construction commenced on new homes and renovations. Businesses also increased their construction expenditure, particularly miners and energy suppliers, despite trimming spending on plant and equipment. The mining, hospitality, and tourism sectors, impacted by floods and cyclones, are expected to recover. The effects of the RBA's February rate cut, which began filtering through to businesses and home buyers in early March, are still unfolding.

A notable shift occurred with public sector investment, which had supported the economy for nearly three years, contracting by two per cent. Treasurer Jim Chalmers highlighted that the private sector was now undertaking the "heavy lifting" for economic growth, stating, "All of the growth in the March quarter was from the private sector." This transition, weaning the country off public works and freeing resources for private enterprise, is seen as a necessary adjustment for the economy.

Economists offered varied perspectives on the RBA's next steps. Abhijit Surya from Capital Economics suggested the GDP figures could bolster the case for further monetary easing, though he cautioned about upside inflation risks from rising labor costs, predicting the RBA would cut rates to 3.35% in the current cycle. Cherelle Murphy of EY argued that the economy requires "much more monetary easing," especially as the full impact of the Trump administration's policies on the global economy is yet to materialize. Ben Udy from Oxford Economics posited that continued economic weakness could lead to another rate cut as soon as July. Conversely, Adam Boyton from ANZ believed the economy is in better condition than the headline 0.2% growth suggests and did not foresee a July rate cut. Financial markets, however, had already priced in a high probability of a July cut, which increased following the GDP release, with some expecting a subsequent cut in August. The RBA's decision will hinge on its overall assessment of the economic outlook, often described as whether it views the glass as "half full or half empty."

The global economic landscape, particularly the potential for the Trump administration's grand tariff plans to plunge the US and other nations into recession, remains a significant concern for Australia. Following the GDP data release, the benchmark S&P/ASX 200 index saw a modest rise of 0.83%, while the Australian dollar remained relatively stable, trading around 0.6460 against the US dollar.