Annual growth held at 2.5%, also below the 2.7% consensus. The Australian dollar was flat at $0.7178 following the release, with bond futures little changed, suggesting markets had already priced in a soft outcome.
Net trade subtracted 0.8 percentage points from quarterly growth as imports surged, with data centre equipment and fuel the two dominant categories. The fuel import bill reflects the Hormuz disruption that has driven energy prices sharply higher since the US-Iran conflict began, while the equipment surge speaks to a data centre construction boom that is reshaping Australia’s capital expenditure profile. Private business investment rose 6.0% in the quarter, reaching its highest share of real GDP at 12.6% since September 2015, with machinery and equipment alone adding 0.7 percentage points to growth.
Domestic demand contributed a full percentage point to quarterly GDP, a reading that will keep the Reserve Bank of Australia alert to inflation risks even as the headline growth number disappoints. The RBA has raised rates three times this year and its own forecasts project annual growth slowing further to 1.9% by the second quarter and 1.3% by year-end, a trajectory that implies the tightening is working but has further to run in its impact on household budgets.
Real GDP per capita fell 0.1% in the quarter and stands only 1% above its level a year ago, underlining the per-person squeeze that aggregate figures obscure. Final consumption slowed to 0.3% from 0.5%, and with the May services PMI already in contraction territory and the Middle East conflict continuing to inflate costs, the Q2 picture is shaping up to be considerably darker than Q1.
Swap markets imply just a 7% probability of a fourth rate hike at the RBA’s next meeting and price a total of 23 basis points of additional tightening for the full year, suggesting the hiking cycle is broadly seen as complete. Whether that view holds will depend heavily on how quickly the war-driven inflation impulse feeds through to wages and services prices in the months ahead.
RBA dates this year:
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The miss versus the 0.5% consensus is modest in isolation but the composition is what matters for the RBA: domestic demand ran hot enough to keep the central bank on guard, even as the headline number disappointed. Three rate hikes already this year have not yet fully transmitted, and with the services PMI now in contraction and the Middle East conflict continuing to inflate fuel costs, the RBA’s own forecast of 1.9% annual growth by Q2 and 1.3% by year-end looks increasingly credible
