Economy stalls as private sector fails to pick up slack

Gross domestic product slowed to 0.2 per cent in the first three months of 2025, down from a 0.6 per cent rise in the December quarter and weaker than economists had been expecting.

"There was nothing to be happy about in the national accounts numbers today," mused EY's chief economist Cherelle Murphy.

While Treasurer Jim Chalmers said any growth was a decent outcome, given global uncertainty, a return to falling GDP per capita - a common measure of living standards - is worrying news.

There was a fair bit of bad luck in the numbers.

Disruptions from Cyclone Alfred and flooding in Queensland and Northern NSW cut $2.2 billion from the national economy, Treasury estimates.

Mining, tourism and shipping were particularly impacted, but  underlying growth remains soft, particularly household consumption.

The economy had been boosted in recent years by stronger public spending, but as state government infrastructure projects come off and energy rebates unwind, Dr Chalmers promised momentum would shift to the private sector.

Westpac senior economist Pat Bustamante has been warning about the potential for a "shaky handover".

"In line with our updated expectations, public demand fell and the private sector struggled to pick up the slack," he said.

Public spending recorded the largest slowdown since the September quarter 2017, partly down to the government's efforts to curtail spending on the NDIS.

But household consumption growth was softer than the previous quarter at 0.4 per cent.

Even that was driven by a strong bounce in spending on electricity bills, as state government rebates lifted off.

Dr Chalmers saw a silver lining in the figures.

"There wasn't a lot of growth in March, but what growth there was was private-sector led, and that's an encouraging sign," he told reporters.

The treasurer said Australia was still better placed than peer economies.

"When you look at these numbers today, no major advanced economy has our combination of unemployment in the low fours, inflation below 2.5 per cent, and three years of continuous growth," he said.

Declining interest rates and rising disposable income from real wages growth should boost household spending.

But economic uncertainty from Donald Trump's tariffs remains a headwind.

Trade barriers will continue to weigh on economic growth, with the worst effects of global uncertainty not expected to show up in the data until the June quarter.

The Paris-based Organisation for Economic Cooperation and Development downgraded its forecast for Australia's GDP growth from 1.9 per cent to 1.8 per cent in 2025.

But the outlook is rosier in 2026, with economic growth expected to accelerate to 2.2 per cent as interest rates continue to fall and disposable incomes recover.

Rates markets implied about an 80 per cent chance for the RBA to cut interest rates by 25 basis points at its next meeting in July, with two more cuts expected by Christmas.

Annual economic growth held steady at 1.3 per cent, meaning the economy would need to rise by 0.7 per cent in the June quarter to meet the Reserve Bank's forecast of 1.8 per cent growth year-on-year.

An outcome below that would heighten the chance of further interest rate cuts.