**Australia’s Economy Slows in Q1—Market Watches for RBA’s Next Move**

Australia’s economy got off to a sluggish start in 2025, with first-quarter GDP rising just 0.2%, well below the expected 0.4%. On a yearly basis, growth came in at 1.3%, also underperforming market forecasts of 1.5%.

Weak consumer spending and stagnant government expenditure were key drags on overall performance. Government spending, in particular, made its weakest contribution to GDP since 2017. Per capita GDP fell by 0.2%, while productivity declined 1%—both signs that growth momentum is clearly lacking.

Australians are growing cautious, and it’s showing in their saving behavior. The household savings rate rose to 5.2% from 3.9% last quarter, as more consumers opted to save instead of spend. Final consumption edged up just 0.2%, down from 0.5% the previous quarter.

In this environment, attention is squarely on the Reserve Bank of Australia. Since February, the RBA has cut interest rates twice, bringing the benchmark rate to 3.85%. According to the central bank’s May meeting minutes, policymakers even considered deeper cuts in response to global headwinds, particularly uncertainties around U.S. trade policy.

Ben Udy, Chief Economist at Oxford Economics, notes that while it’s too early to draw firm conclusions, early signs suggest pressure on both consumption and investment will continue into Q2. If weakness persists, the likelihood of another rate cut in July grows stronger.

Looking further ahead, the OECD predicts the Australian economy will regain some footing after short-term softness, with growth forecast at 1.8% in 2025 and 2.2% in 2026. Inflation is expected to stay within the RBA’s target range, averaging around 2.3% over the same period.

Still, risks remain. China’s slowing economy could impact Australia through weaker demand for commodities, and past interest rate hikes have already squeezed household disposable income, potentially limiting near-term recovery.

Following the GDP release, bond yields dipped slightly, while the Australian dollar remained relatively stable. Most analysts agree that the latest data won’t deter the RBA from future policy moves. If further easing is on the table, markets appear prepared.

The coming months will be critical in shaping the outlook for Australia’s economy. For investors and markets alike, keeping a close eye on policy direction, consumer sentiment, and investment trends will be essential.