Economists warn of recession as Australian economy slows to its weakest in a decade

Economists warn Australia is heading to a recession next year. Photo / 123RF

The Australian economy has slowed to its weakest level since the tail of the Global Financial Crisis in 2009.

Just a day after the Reserve Bank was forced to slash the official cash rate to its lowest level in history, Australian Bureau of Statistics data revealed the economy grew by just 0.4 per cent in the three months to March and by 1.8 per cent in the last year.

The annual growth had fallen from 2.4 per cent in the year to the end of December.

Government spending made a major contribution to growth in the latest quarter, with more cash flowing into disability, health and aged care services.

Westpac senior currency strategist Sean Callow said in a tweet the economy's reliance on infrastructure spend was a "miserable detail" in the ABS figures.

Household spending was weak, with people buying fewer non-essential goods including furniture and meals at restaurants.

Treasurer Josh Frydenberg insists the looming lower and middle income tax cuts and the official interest rate falling 25 basis points to 1.25 per cent will allow consumers to go out and spend.

He hopes this will keep the economy ticking over.

"The provision of the tax cuts, as well as the interest rate decision yesterday, will boost household disposable incomes and will be important as part of compensation," he said.

The southeastern drought also took a toll on growth, with farm GDP down on the same time last year, and crop production falling in the quarter.

This morning, Frydenberg spruiked employment growth to rebuke claims the need for a cut to its lowest level in history proves the economy is in a dire position.

But he did admit "there are some challenges" related to weak inflation and the struggling property market.

"We are facing economic challenges both domestically and internationally, particularly from the trade tensions between China and the US," Frydenberg told Nine's Today program.

AMP Capital chief economist Shane Oliver said the economy's recent dependency on investing in government projects and net exports kept the growth from flattening out completely.

But this will come to an end next year and Australia will have a higher risk of recession, he said.

"The outlook for 2020 looks challenging as government infrastructure spending looks like it will slow after this year, residential construction looks likely to continue to decline, the consumer is expected to remain weak and risks are building around the global economic outlook as a result of (US President Donald) Trump's trade wars," he said in a note.

"More RBA interest rate cuts along with fiscal stimulus are likely to be necessary to offset the threat to growth."

Chief economist at consultancy firm KMPG Brendan Rynne said consistent rate cuts from RBA governor Philip Lowe might not be enough to get the economy moving.

"Today's GDP figures show the RBA may have missed an opportunity to cut rates more aggressively and use its limited monetary firepower in a big bang rather than spreading it over a few months and dissipating the impact," he said.

"It also puts an onus on the re-elected government to bring forward fiscal stimulus to the economy, by getting new targeted infrastructure projects up and running and ensuring the proposed tax breaks are brought into law soon.

"Monetary policy won't do all the heavy lifting."