World Economy

Australia's economic growth beats forecasts, but concerns persist

Here's the downside to Australia's Q1 GDP

Australia's economy expanded 2.3 percent in the first quarter from the year-ago period, beating forecasts and pushing up the currency, but some were concerned about the quality of the data.

"The surprise is probably that business investments didn't fall [as much] as expected," David Bassanese, chief economist at BetaShares, told CNBC. "Exports volumes surged in the quarter. Coal and iron ore exports were up. The downside is export prices are falling, and also inventories were a big contributor to the number so the quality of the number I think is not fantastic, particularly with consumer spending still being soft."

The headline figure still beat forecasts from a Reuters poll for a 2.1 percent rise on-year, but it was down from the previous quarter's 2.50 percent growth.

After the release of the data, the Australian dollar climbed 0.35 percent to $0.7794, from $0.7769 prior to the data. The S&P ASX 200 index remained in negative territory, down 0.6 percent.

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That follows the Australian dollar strengthening after Tuesday's decision by the Reserve Bank of Australia (RBA) to keep interest rates on hold at a record low 2.0 percent. Some analysts said that was likely just the central bank pausing to see the effect of its cuts in February and May, but others expected that the RBA might be easing away from an easing bias.

Australia's economy has been hampered by a sharp drop in commodity prices, weak external demand and persistently high unemployment. A ballooning budget deficit, which Deloitte Access Economics estimates will be a whopping 46 billion Australian dollars this year, has spurred concerns that the nation's triple-A credit rating may be at risk.

Bassanese isn't alone in his concerns.

Hockey: Australia Q1 GDP is a 'good, solid result'

"While the headline GDP figure might be seen as cause for encouragement, the breakdown is far less reassuring," Daniel Martin, senior Asia economist at Capital Economics, said in a note Wednesday. "The falls in investment show that non-mining investment is failing to fill the hole left by the end of the mining boom. The latest private capital expenditure survey suggests that this is not going to change within the next year or two."

Martin believes declining oil prices have helped to prop up household spending, but he expects the effect will fade as the mining slowdown and commodity price declines hurt job and wage growth.

"The first quarter will be as good as it gets for Australia's economy for some time," Martin said.

Some expect the slowdown ahead could be sharp.

"The drag from the wind back in mining investment still has a long way to run and is likely to be much sharper over coming quarters as large-scale LNG projects approach completion," ANZ said in a note Wednesday. "Added to this is the recent weakness in non-mining investment intentions. And with growth in household consumption remaining soft, it's difficult to see what will drive businesses to lift investment."

--See Kit Tang and Li Anne Wong contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1