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Australia’s economy on fire in first quarter

Australia's economy grew 3.5 percent on-year in the first quarter, its fastest pace in nearly two years, data on Wednesday showed.

The rise in gross domestic product (GDP) followed a 2.8 percent increase in the fourth quarter and compared with analyst forecasts in a Reuters poll for a 3.3 percent rise.

Economists had anticipated a strong number after current account data on Tuesday showed that net exports added 1.4 percentage points to GDP in the first quarter.

Read MoreAustralia's central bank leaves key rate at 2.5%

"It's a fantastic outcome given expectations for sub-trend growth," said Shane Oliver, head of investment strategy and chief economist at AMP Capital in Sydney.

"But a lot of things occurred that won't be repeated in subsequent quarters. For example, we saw a huge surge in resource exports, particularly iron ore," he added. "I think they will remain strong, but you won't get the same growth rate repeated again which is what you will need for that kind of GDP growth."

The data comes a day after the Reserve Bank of Australia (RBA) left its key interest rate unchanged at a record low of 2.5 percent and said that there was likely to be a period of stability in interest rates.

Pedestrians cross an intersection at Collins Street and Swanston Street in central Melbourne, Australia.
Carla Gottgens | Bloomberg | Getty Images
Pedestrians cross an intersection at Collins Street and Swanston Street in central Melbourne, Australia.

Economists say despite a strong start to the year, there are signs that Australia's economy is headed for slower growth in the months ahead.

"Over the next few quarters, we know there's weakness in household spending, mining investment is also slowing," Stephen Walters, the chief economist for Australia at JPMorgan, told CNBC ahead of Australia GDP data on Wednesday.

Read MoreIs trouble in store for the Australian economy?

Analysts at Goldman Sachs meanwhile expect the RBA to step in with a quarter-point cut in rates in September to support the economy.

Australia's economy faces headwinds from a slowdown in mining investment, which has been a key growth driver in recent years. There are also concerns that last month's stringent budget measures to address a budget deficit could weigh on consumer spending in the months ahead.

The government plans to raise income tax for those earning above A$180,000 ($166,000) by 2 percent, cut 16,500 public sector jobs, roll back universal healthcare and lift the pension age.

Read MoreAustralia's budget: Harsh or fair?

"We have seen that the May budget beat confidence and that has hit consumer spending," said AMP's Oliver.

"My feeling is that growth will slide back down again in the current quarter probably down to around 0.5 percent in the quarter. So I think you will see growth "ok-ish" but we'll go back below trend in terms of the quarterly pace."

On a quarterly basis, the Australian economy grew 1.1 percent in the first quarter, also beating market expectations.

Australian stocks trimmed their losses after the GDP data, while the Australian dollar erased earlier losses, rising 0.2 percent to approach 93 U.S. cents.

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