Q1 GDP Partials & Forecast Update
We have downgraded our GDP forecast to 0.1%qtr and 1.2%yr in Q1 2025 following the latest batch of indicators. Public demand, net exports and investment in intangibles all disappointed. While some of the weakness reflects bigger than expected impacts from weather-related disruptions, it is undoubtedly the case that growth remains sluggish.
Q1 GDP Forecast Update
The Australian economy is expected to have grown just 0.1%qtr and 1.2%yr in Q1 2025 (equal weakest annual growth since the March quarter 1992 outside of covid).
The domestic demand impulse (spending by consumers, businesses, and governments) is expected to have almost stalled, up just 0.1% in Q1, a step down from the already weak 0.3%qtr we expected in our preview (see here).
There is a small risk growth in GDP could be a small negative in Q1 given total private sale volumes declined 0.1%qtr. Private sales outside the mining and finance sectors grew by just 0.2%qtr, showing the extent of the slowdown once accounting for the impacts of the weather-related disruptions on the mining sector.
New public demand declined 0.4%qtr and will detract 0.1ppts from growth in Q1. This was even weaker than our ‘out of consensus’ view that new public demand would make no contribution to growth this quarter. New public investment declined 2.3%qtr as work in some major infrastructure projects starts to taper. State and local government consumption spending also declined, partly as temporary cost of living assistance expired.
We have shaved growth in new business investment lower as mining exploration expenditure declined a hefty 2.4%qtr in Q1.
When it comes to the more volatile components of GDP, we are expecting a flat contribution from net exports and inventories (lower than the small positive contribution of +0.1ppts we expected in our preview). The external sector is now expected to detract around -0.1ppts from growth in Q1. The bad weather which hit parts of Qld and NSW during the quarter disrupted mining exports, which fell significantly over the quarter. This was partly offset by a bring forward in gold exports during the quarter. Mining output was instead used to build inventories, which will see total inventories contribute 0.1ppts to growth in Q1.
While some of the weakness reflects the direct and indirect (or ‘confidence’-related) impacts of the bad weather events, it is undoubtedly the case that underlying growth remains sluggish. Without a pickup in private demand, the shaky handover from the public sector could result in a period of below par economic growth.
As always, ‘partial’ indicators should be treated with caution. They are not always a reliable guide to national accounts components and there are significant areas that do not have regular partial measure. However, almost all of the Q1 partials have been highlighting downside risks to the quarter.
Public Demand
Following a sustained period of growth in public demand, Q1 saw a marked deterioration resulting from a sharp fall in public investment. New public demand fell 0.4% in Q1, thereby detracting –0.1ppt from GDP growth in the March quarter - the largest detraction in almost a decade and a large step down from the average quarterly contribution of +0.4ppts over 2024.
New public demand as a share of GDP is expected to dip from its current record high of 27.7% to around 27.6% in Q1.
Public investment was the primary drag in the quarter. Despite a healthy pipeline of work, total public investment slid –2.0% as work in some major infrastructure projects starts to tape. Excluding asset transfers, new public investment was down –2.3% in Q1 – the sharpest fall since Q2 2020. This weakness stemmed from state and local governments, which outweighed positive impetus coming from the federal government.
However, public consumption was the main downside surprise in the quarter. Despite ongoing cost-of-living support, government consumption was flat in Q1 – its weakest result since Q3 2022. Consumption has now slowed from 1.7% in Q3 2024 to 0.6% in Q4 and 0.0% in Q1, shifting the annual rate lower to 3.4%. Compositionally, spending by the federal government (0.3%) offset weakness in state and local government spending (–0.3%).
Government borrowing was $17.4bn in Q1, equating to a little under $800 for each member of the working age population. This marked a slowdown from borrowings of $27bn and $38bn in the previous two quarters.
External Sector
The external sector was distorted by significant data revisions and one-off factors in the March quarter. The headline current account deficit came in at $14.7bn, close to our forecast of $14.0bn. However, it was reached from a different point in the December quarter, as today’s figures showed a $3.8bn upward revision to the current account deficit reported three months ago, to $16.5bn.
Among key current account components, the primary income deficit narrowed by $2.2bn to $19.4bn, driven chiefly by non-residents’ weaker return on foreign direct investment in Australia. The ABS highlighted that the coal mining sector, which accounts for a high share of foreign direct investment into the domestic economy, played a significant role due to lower commodity prices.
The nominal trade surplus was little changed from the downwardly revised levels, at $5.4bn. Given that the terms of trade – the ratio of export to import prices – rose marginally, in real terms the trade surplus narrowed only slightly. Price-adjusted goods exports fell by 0.3%qtr. As expected, high prices and strong global demand attracted a significant increase in gold outflows, mostly to the US. But it was offset by weak coal exports and to a lesser extent other mineral fuels. The ABS highlighted that weather events – most notably Cyclone Alfred in Queensland – disrupted coal production and its flow through major ports. Excluding coal, total goods exports would have increased by 1.4%qtr. On the import side, goods inflows were also 0.3% lower, mainly due to a 3.9%qtr drop in capital goods.
With regard to services trade, exports declined 3%qtr recording the lowest result since the pandemic. The weakness was fully accounted for by the travel category, which records spending by visitors to Australia including all international students. Services imports also declined, by 0.8%qtr, almost unchanged from the growth pace in the December quarter, as the travel category, capturing holidays abroad, eased for a second consecutive quarter from the record highs reached in the September quarter.
Overall, today’s figures showed that net trade will subtract 0.1ppt from GDP growth in the March quarter. Note that downward revisions mean the net export contribution to December quarter GDP is now -0.1ppt rather than +0.2ppts.
Inventories
Inventories within the private non-farm business sector increased 0.8% in Q1 following a 0.2% gain in Q4. This came much to the surprise of the market consensus for a 0.2% gain.
The largest contributor to the build-up in inventories was the mining sector, up 1.1%. This was the major surprise, given we had anticipated the surge in gold exports over the quarter to present as a run-down in mining inventories. However, weather-related disruptions to coal production and port operations were likely an important factor explaining the build-up in mining inventories. Non-mining inventories rose 0.3%, while public inventories fell in the quarter.
The net effect is that total non-farm inventories will be a positive contributor to growth, adding +0.1pts to Q1 GDP.
Sales
Sales volumes fell –0.1% in the March quarter, but with a weaker print from Q1 2024 cycling out, the annual pace has lifted from 0.3%yr to 0.8%yr.
Again, the surprise was largely around the mining sector, with sales falling –3.4% in the quarter following a –0.5% decline at the end of last year. Given the weather-related disruptions for coal exports, some of this will prove to be temporary. This decline was largely offset by increases across other industries, with non-mining sales volumes up 0.4% in Q1 and 1.2% over the year.
This provides us with a very general guide as to what we might expect for private demand, with today’s update suggesting it started the year on relatively soft footing. However, we caution that this is by no means an accurate indicator for private demand on a quarter-to-quarter basis given this survey’s lack of coverage of sectors that have being growing more strongly (e.g. health care and education), nor is it a direct input into the expenditure estimates for the National Accounts.
Company Profits
Profits also surprised to the downside, falling –0.5% in the March quarter, below our forecast (1.8%) and the market median (1.3%).
We underestimated the impact of weather-related disruptions to coal production, which is likely the main contributor behind the –6.0% fall in mining profits during the quarter. This, together with the easing in commodity prices over recent years, has mining profits down –19%yr. The non-mining sector was meanwhile more constructive, with profits up 3.1% (6.2%yr) in Q1.
Recall that being an accounting survey, this data incorporates changes in the prices of inventories – called the inventory valuation adjustment (IVA) – into the profit measure, but in an economic sense, IVA does not represent a true change in profitability. This has been a more prominent issue in recent times with significant quarter-to-quarter shifts in the IVA driving large swings in accounting profit measures in this survey.
Today’s data revealed that the IVA added $2.3bn to total profits in Q1, compared to adding $1.7bn in Q4. After adjusting for this, we calculate that the fall in gross operating surplus as measured in the national accounts is closer to –0.9%. The ABS also employs slightly different seasonal factors between gross operating profits in this data and official measures of gross operating surplus in the National Accounts.
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Australia and NZ Weekly 2 June 2025
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