GDP drops by biggest amount in 20 years in March quarter but economists say growth will return

The Australian economy slowed by 1.2% in the first quarter, official figures released today show, with a decline in exports proving to be the biggest drag on the country’s economic performance, detracting 2.4 percentage points from GDP expenditure.

The result is largely in line with expectations, with many economists expecting a drop in GDP of anywhere between 0.5 points to 2 percentage points. It represents the largest quarterly drop in 20 years, with the most recent fall being the 0.9% decline recorded in 2008.

The Australian economy has only grown by 1% over the past year, the ABS says.

However, some economists do not believe the weakness will be sustained, and that growth will return in the second quarter.

The ABS shows in trend terms, GDP fell by 0.2% and non-farm GDP also fell by 0.2%. But in seasonally adjusted terms, GDP fell by 1.2%, with non-farm GDP falling by 1%. The terms of trade rose by 5.8%.

Apart from net exports, the main detractors to the economy were mining, detracting 0.6 percentage points, while manufacturing and agriculture both detracted 0.2 points each from GDP.

The result bolsters the current opinions of many economists who believe the country is now running a two-speed economy. Pessimistic data, such as today’s release from the Australian Industry Group that shows manufacturing contracted in May, seems to back up that view.

Such results indicate the Reserve Bank will be hesitant to raise interest rates next week.

But economists say the temporary slowdown is purely caused by a massive hit on exports due to the Queensland and New South Wales floods that occurred in September, along with the impacts of cyclone Yasi, and expect growth to return.

CommSec economist Craig James, who spoke before the GDP figures were released, says the weakness is largely contained to the mining sector and was caused by one-off events.

“It’s more than likely that growth will bounce back. But we can’t be complacent and take that for granted,” he says. “The Reserve Bank has to stay on the sidelines and acknowledge the result to support growth.”

The GDP figures come alongside a suite of disappointing results for the manufacturing industry, building and construction and the trade deficit.

“All the indicators we’ve had over the past month have been weak,” James said. “We cannot just take it for granted that the economy is going to bounce back. Clearly the elephant in the room is the cyclone impact on coal exports, but the underlying position of the economy is still soft.”

ANZ economist Julie Toth agrees, and says the weakness is concentrated in only one of several areas.

“What’s pushing GDP into the negative in the first quarter is the direct result of the Queensland floods. The drag that showed up in yesterday’s trade data will take away points from headline GDP growth, so even if the rest of the economy is growing, GDP will weaken.”

“But this isn’t being caused by a slowdown in the domestic economy. It is possible that trade will continue to be disrupted, but we would expect to see an improvement.”