TD Securities strategists Prashant Newnaha and Alex Loo note that Australian Q1 Gross Domestic Product (GDP) matched the Reserve Bank of Australia’s (RBA) 0.3% q/q implied forecast, but highlight that household and government spending are weak while data centre investment props up activity. They stress that the economy is still growing above its speed limit and expect one final 25 bps RBA hike in August.

RBA path shaped by weak demand

"Q1 GDP landed bang in line with the Bank's implied 0.3% q/q forecast. However, a breakdown of the data reveals that outside of data center investment, household and government spending is weak."

"Of the 0.95% pts increase in private demand, 0.69% pts came from Private Investment - thanks to the data center build-out. The contribution from private investment to GDP was the largest since Q1'21."

"An important detail worthy of note is the drop in Government consumption was influenced by the end of the Government electricity rebate. We estimate this to have sliced 0.3% pts off Government consumption and mechanically, this would have boosted quarterly private consumption by the same magnitude. Excluding the electricity rebate, the private consumption contribution to GDP would have been flat!"

"Of more concern for the RBA is the breakdown - household spending is weak with economic activity essentially being held up by the data center build out. It doesn't help productivity is weak, -0.6% q/q in Q1."

"Looking ahead, economic conditions are less than ideal - S&P Global's Composite PMI for May points to downside risks for Q2 GDP growth but upside risks to the Bank's 1% q/q trimmed mean CPI forecast for Q2."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)