Australia has just recorded its second straight quarter where the economy shrank on a per capita basis.

Key points: Australia's economy slowed from 4pc annualised growth at the start of 2018, to around 1pc in the second half

Australia's economy slowed from 4pc annualised growth at the start of 2018, to around 1pc in the second half Growth of 2.3pc over 2018 is well below RBA forecasts and places more pressure on the bank to cut rates

Growth of 2.3pc over 2018 is well below RBA forecasts and places more pressure on the bank to cut rates Australia's economic output shrank 0.2pc per person in the fourth quarter, after a 0.1pc decline in the third

Removing the impact of population growth from fourth quarter GDP figures, the economy declined by 0.2 per cent in the three months to the end of the year, following a 0.1 per cent decline in the three months to September.

Including population growth does not make the picture much rosier, with the economy growing at just 0.2 per cent over the fourth quarter.

The weak result dragged down Australia's economic growth last year to 2.3 per cent, well below the Reserve Bank's optimistic call of 2.8 per cent and beneath even the more pessimistic analyst forecasts.

It also shows a dramatic slowdown over the course of last year, with annualised growth over the second half of the year coming in at 1 per cent, compared with the brisk 4 per cent in the opening months.

"Growth in the economy was subdued, reflecting soft household spending and a decline in dwelling investment," ABS chief economist Bruce Hockman said.

"The approvals for dwelling construction indicate that the decline in dwelling investment will continue."

Treasurer Josh Frydenberg said the fundamentals of the economy remained strong despite the impact of falling consumption spending and the drought.

"It was a challenging year in halves when it comes to growth — strong quarters in March and June and slower than that in September and December," Mr Frydenberg said.

Sorry, this video has expired Treasurer says per capita GDP not a good indicator of economy's health

Government spending covers weak private sector

The domestic sector continues to struggle, with consumption up a weak 0.4 per cent over the quarter, while private sector investment and demand effectively contributed nothing to GDP growth, compared with the 0.4 percentage points they added over the previous four quarters.

The biggest contributor to growth was government spending.

"Public investment remained at high levels with state and local government growth of 6.3 per cent reflecting continued work on a number of large infrastructure projects," Mr Hockman said.

"Government final consumption expenditure grew 1.8 per cent, with ongoing expenditure in health, aged care and disability services.

"This investment translates to ongoing strength from the healthcare industry, which remains the largest contributor to economic growth."

Household spending and income 'mismatch'

ANZ's Felicity Emmett said the figures were disappointing, particularly the ongoing weakness in the household sector, where vehicle sales, household goods and utilities spending were the main drags.

"The motor vehicles and household goods are probably related to credit tightening and perhaps an impact of the wealth effect," Ms Emmett told ABC News Channel.

"When we drill down to look at household's experience, you can see that things like wages and household income growth is still very low."

Ms Emmett said there was a big mismatch with consumer spending still outpacing household income growth.

"So consumers are still assuming that their household income will pick up to match consumption spending," she added.

"I think in this new world of ongoing low wage growth, that is actually, perhaps, an unreasonable assumption."

This is a topic that Reserve Bank governor Philip Lowe addressed in a speech on Wednesday morning, arguing that weak pay growth and low wage expectations were a bigger long-term threat to consumer spending than falling house prices.

The change in consumer habits is reflected in slight uptick in the income-to-savings ratio, which in turn points to a more conservative approach to spending developing.

Citi's Paul Brennan said the rise in savings is consistent the negative wealth effect from falling house prices, while the weakness of consumer spending reflects poor income growth.

"Although nominal [non-inflation adjusted] GDP is growing strongly … the share going to employees has declined in contrast to a rising profit share," Mr Brennan wrote.