June 6, 2017 08:30 CDT

Consensus Actual Previous
Quarter over Quarter 0.2% 0.3% 1.1%
Year over Year 1.6% 1.7% 2.4%

Australia's gross domestic product grew by 0.3 percent on the quarter in the three months to March, slowing from an increase of 1.1 percent in the three months to December. This was just above the consensus forecast for an increase of 0.2 percent. Year-on-year growth in GDP also slowed from 2.4 percent in the three months to December to 1.7 percent in the three months to March, also just beating the consensus forecast of 1.6 percent. This is the weakest year-on-year growth recorded since 2009 in the wake of the global financial crisis.

This slowdown in growth was mainly driven by investment spending and net exports. Consumption spending rose 0.6 percent on the quarter and 2.5 percent on the year in the three months to March, down from 0.7 percent and 2.8 percent in the three months to December. Growth in investment spending slowed from an increase of 2.6 percent on the quarter in the three months to December to a decline of 0.6 percent in the three months to March, with year-on-year growth moderating from a fall of 0.1 percent to a drop of 0.4 percent. Investment in dwellings was particularly weak, down 4.4 percent on the quarter. Net exports, meanwhile made a negative contribution to quarter-on-quarter headline growth of 0.7 percentage points in the three months to March after a making a positive contribution of 0.2 percentage points in the three months to December.

Nominal GDP rose 2.3 percent on the quarter in the three months to March, with higher commodity prices providing much of the momentum. Higher commodity prices also helped to push Australia's terms of trade up 6.6 percent on the quarter and 24.8 percent on the year.

The drop in GDP growth reported today was widely anticipated, with previously released balance of payments and public finances data pointing in this direction. In the statement accompanying their decision to leave policy rates on hold this week, officials at the Reserve Bank of Australia noted that a slower expansion was likely in the three months to March, consistent with recent "quarter-to-quarter variation in the growth figures".

Looking ahead, however, officials continue to forecast a gradual increase in economic growth to just over 3.0 percent over the next two years. This confidence partly reflects their assessment that the transition to lower levels of mining investment that has impacted headline GDP growth in recent years is now "almost complete". This suggests that the drop in GDP growth shown in today's report will have relatively little impact on upcoming policy decisions.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy and is usually released early in the third month after the reference period.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Stock market Investors like to see healthy economic growth because robust business activity translates to higher corporate profits. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. These data, which follow the international classification system (SNA93), are readily comparable to other industrialized countries. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Each financial market reacts differently to GDP data because of their focus. For example, equity market participants cheer healthy economic growth because it improves the corporate profit outlook while weak growth generally means anemic earnings. Equities generally drop on disappointing growth and climb on good growth prospects.

Bond or fixed income markets are contrarians. They prefer weak growth so that there is less of a chance of higher central bank interest rates and inflation. When GDP growth is poor or negative it indicates anemic or negative economic activity. Bond prices will rise and interest rates will fall. When growth is positive and good, interest rates will be higher and bond prices lower.