Australia's Q1 GDP Growth Slows Below Expectations

Australia's economy expanded less than expected in the first quarter, as subdued household spending, a pullback in government consumption and severe weather disruptions to mining and exports weighed on growth.

The country's GDP expanded 2.5% in the first three months this year, compared to a year earlier, missing economists' expectations for a 2.6% growth, data from the Australian Bureau of Statistics showed Wednesday.

On a quarter-on-quarter basis, Australia's GDP grew 0.3% compared with 0.5% forecast in a Reuters poll, and slowing from 0.8% growth in the prior quarter.

Despite the miss, the economic momentum has prompted traders to wager on further rate hikes as the Reserve Bank of Australia seeks to keep prices in check. The central bank delivered its third interest rate hike this year in May, taking its cash rate target by 25 basis points to 4.35% amid renewed inflation worries.

The growth outlook has darkened due to the prolonged Middle East conflict, which has effectively halted oil flows through the Strait of Hormuz, pushing up energy and commodities prices globally. While Australia is a net energy exporter, a sustained rise in commodities costs could ultimately weigh on consumer demand.

The first-quarter data is "too early to capture any material spillovers from the conflict," with negative growth effects more likely to be felt in the second quarter, Nick Stenner, Australia and New Zealand economist at Bank of America said Monday.

The Reserve Bank of Australia will likely focus on the strength of private demand before factoring in the conflict, alongside inflation risks stemming from weak productivity and rising unit labor costs, according to Stenner, who expects household consumption to weaken in the second quarter.