The Australian economy slowed noticeably in the March quarter, supporting anecdotal reports from retailers and other businesses that the economy had gone off the boil.

If it wasn’t for another strong quarter of government spending, especially the federal schools program, the Australian economy might have been hard pressed to remain on the positive side of the ledger.

That, plus a small rise on private spending, offset a sharper-than-expected fall in business investment and the negative impact of the trade account.

Figures today for the March quarter growth from the ABS revealed gross domestic product rose 0.5% from December, when it jumped sharply, by a revised upwards 1.1% (0.9% originally).

The March quarter rise matched the forecast from market economists. That produced an annual rate of 2.7% for the year to March, down from 3.1% in the 12 months ending December.

The slowing in the rate of growth reflects the impact of rate rises by the Reserve Bank, the three in late 2009 and one in February would have been the more important.

They saw household spending rise 0.6% in the quarter, down from the 0.9% rate in the December quarter, while business investment was also weak.

The Reserve Bank won’t be unhappy to see the slowing in spending because it should help ease pressure on prices and resources.

The ABS said that growth in the expenditure measure of GDP was driven by an 11.6% increase in public investment and a 0.6% increase in household expenditure. “Offsetting these increases was a fall in private investment (down 0.6%) and in net exports. The fall in net exports was due to an increase in imports (up 1.8%) while exports fell (down 0.5%).”

The ABS said non-farm GDP grew 0.7% in the quarter, the terms of trade rose 4.2% and real gross domestic income jumped 1.3% as the improvement in the rebound of the resources exporting sector kicked, as predicted by the Reserve Bank and federal treasury. Even though the volume measure for GDP rose by just 0.5%, the 4.2% rise in the terms of trade in the quarter (3.2% in the December quarter) produced the solid rise in real gross domestic income.

The ABS said real net national disposable income, (which adjusts the volume measure of GDP for the terms of trade effect, real net incomes from overseas and consumption of fixed capital), rose 1.8% seasonally adjusted in the quarter: “Growth over the past four quarters was 1.5% compared with 2.7% for GDP,” the ABS commented.

Judging from what businesses are reporting, the Reserve Bank’s credit figures for April, the less-than-buoyant retail sales figure for the same month, but importantly, the 14% slide in building approvals, there’s every chance the economy is still operating at the subdued pace seen in the first quarter.

On top of that is the surge in concern about what’s happening in Europe.

So, mark the GDP and other first-quarter measures as a solid historical record. Instead, focus on the more uncertain outlook that has forced the Reserve Bank to concentrate in the spillover of Europe’s debt problems, plus the worries about the Chinese economy. Yesterday’s decision to keep rates on hold reflected concerns about what’s happening offshore, than worries about the growth path of the domestic economy over the rest of 2010.

The RBA knows that all it will take for the global economy to slow sharply will be a major European bank in trouble or a corporate event that shakes confidence in banks, markets and governments. And there are more than a few candidates in Europe and the US (a repeat of the the Flash Crash of May 6 on Wall Street could quite easily be the catalyst), or a sharp fall in Chinese house prices or growth.

The growth figures are important indicators, as always, of what has been happening in the economy, but the international economy, especially in Europe, has changed so much in the past six weeks, that the economic conditions in the three months to March, no longer matter.

In its last statement of monetary policy, the Reserve Bank singled out the tensions in Europe as a major downside risk (and also a possible too rapid slowing in the Chinese economy).

This morning in Canberra, AAP reported the executive director of treasury and head of its macroeconomic division, Dr David Gruen, said the current situation in Europe was clearly something that was going to play out over an “‘extended period of time” and cause bouts of market volatility.

“The fiscal situation in Europe is very serious and how that is resolved remains to be seen,” Dr Gruen said, who went on to describe it as the the largest obvious event that presented a downside risk to the Australian economy.

On the positive side, Dr Gruen said the very strong data was coming from Asia and east-Asian economies including India. “Despite recent falls in commodity prices, commodity prices remain at very high levels, in fact are consistent with further increases in negotiated prices for bulk commodities.”

Nothing much has changed here, but it has in Europe.

Peter Fray

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