Australia's economy growing at 2.5 per cent annually as slowdown begins

Australia's economy slowed in the March quarter. (ABC News: Stephen Cavenagh)

Australia's economy grew by 0.3 per cent in the March quarter, down from 0.9 per cent in the December quarter.

The annual rate of growth remained steady at 2.5 per cent, but that is forecast to decline through the year.

Reserve Bank governor Michele Bullock has warned Australia will experience a rough time in the coming months.

Australia's economy grew at an annual rate of 2.5 per cent in the March quarter, the same as in the previous quarter.

But on a quarterly basis, the economy grew by just 0.3 per cent, which was much weaker than the 0.9 per cent recorded in the previous quarter.

The rapid slowdown in the quarterly rate of growth coincided with the Reserve Bank's decision to lift interest rates in February and March.

The RBA has forecast the economy to expand by 1.9 per cent over the year to June, so it is expecting a further weakening of the economy in coming months.

Monetary policy trade-offs are getting worse — the Reserve Bank of Australia is confronting rising inflation and downgraded growth forecasts. And there's nothing much it can do.

"Rising interest rates and significantly higher fuel costs in the March quarter likely created an environment for more cautious consumer behaviour," she said.

"This resulted in reduced spending across a range of household expenditure categories."

Earlier this week, Westpac's economics team said Australia's economy was already slowing before the conflict in the Middle East, or the RBA's rate hikes in February, March and May, had really started to impact.

"The significant headwinds from the conflict will be more fully reflected in the second quarter of 2026, with the possibility of a quarterly contraction which would be the first quarterly decline since the GFC (excluding COVID)," they warned.

Last month, RBA governor Michele Bullock warned that Australia was "staring down the barrel" of a very rough time in coming months as inflation rose, the economy slowed and unemployment slowly picked up.

She also said that the RBA's three recent rate hikes were not going to do anything for inflation in the next six months, given the lag time in how monetary policy works.

Economists had also predicted that the collapse in business and consumer confidence in recent months, in response to the war in the Middle East and the global surge in inflation, could hit Australia's economic activity in a big way.

Australia's minimum wage will increase by 5.97 per cent, and minimum award workers will get a 4.75 per cent pay boost, in the Fair Work