Australia’s GDP came in at 0.2% q/q in 1Q23, below expectations for a reading of 0.3% q/q, and below the revised 0.6% q/q print in 4Q22 (0.5% q/q previously). From a year earlier, the economy expanded by 2.2% y/y, also a tad below expectations of 2.4% y/y, and lower from 4Q22’s revised reading of 2.6% y/y (2.7% y/y previously). 

The latest GDP print is in line with our view of growth turning softer as high inflation and interest rates weigh. We see Australia’s GDP growth at 1.5% this year and only a small improvement to around 1.6% in 2024. Key factors to watch will be how households are impacted by higher interest rates, how quickly inflation is able to moderate, and how wage growth ties in with labour market dynamics. 

As for monetary policy, we see a pause at 4.10% at the next monetary policy meeting on 4 Jul. Our view is that while the RBA maintained a tightening stance, the latest move was clearly in reaction to Apr’s inflation numbers. What this also means is that the key risk to our cash rate target call is the reaction function of the RBA and the possibility of the RBA tightening further.