GDP suffers biggest quarterly contraction in 20 years

The Australian economy has suffered its biggest quarterly contraction in 20 years, with gross domestic product falling 1.2% in the March quarter, according to the Australian Bureau of Statistics.

The latest ABS figures reveal GDP fell steeply in the March quarter after a 0.8% rise in December. The first-quarter decline was the biggest fall since the March quarter of 1991, when the economy shrank 1.3% in the midst of a recession.

It’s also the first time GDP has contracted since the December quarter of 2008, at the height of the global financial crisis. Apart from net exports, the main detractors to the economy were mining, manufacturing and agriculture.

“Flooding, which began in late December 2010, combined with cyclones in both Queensland and Western Australian have had a significant impact on the March quarter activity,” the Australian Bureau of Statistics said.

“Despite the fall in GDP volumes, there was an increase of 0.3% in real gross national income driven by an increase of 5.8% in the terms of trade on the back of stronger commodity prices.”

A breakdown of the states reveals WA and the ACT had the strongest growth, while the Queensland, South Australian and Northern Territory economies all contracted.

Westpac chief economist Bill Evans says the steep decline in GDP could make it difficult for the Reserve Bank to raise interest rates next week.

“However, the RBA is almost certain to maintain the strong hawkish rhetoric to ensure that markets and the community have been warned,” he says.

According to NAB, the weakness in the March quarter creates a “perfect storm” for the central bank attempting to tighten interest rates in response to the underlying strength of the economy.

“While the Reserve Bank is looking forward to emerging inflationary pressures, it will be difficult to avoid the tactical complications presented by such a sharp reduction in the historical data,” NAB says.

“This is particularly the case in view of the ongoing softness of the retail and wholesale sectors and a manufacturing industry weighed down by the strength of the dollar.”

NAB chief economist Alan Oster believes the next interest rate rise will most likely be deferred until July.

“A very poor GDP reading will make it more difficult for the board to acquiesce in a rate rise, despite the enthusiasm of officials to pre-empt emerging inflationary pressures,” he says.