Australia's economy grew by a better-than-expected 0.5 per cent in the December quarter and 2.2 per cent over the past year, according to the Bureau of Statistics.

Key points: Australia's GDP growth decelerated from 0.6 per cent in the September quarter to 0.5 per cent in the three months to December

Australia's GDP growth decelerated from 0.6 per cent in the September quarter to 0.5 per cent in the three months to December But the result was better than most economists forecast, with typical estimates around 0.3 to 0.4 per cent

But the result was better than most economists forecast, with typical estimates around 0.3 to 0.4 per cent Westpac economist Andrew Hanlan said real estate transactions and rising inventories boosted GDP in the quarter

Most economists were forecasting quarterly economic growth of 0.3 or 0.4 per cent and annual growth around 2 per cent, although the lowest forecast was from AMP Capital's Shane Oliver, who tipped 0 per cent GDP growth for the quarter.

The Reserve Bank on Tuesday pre-emptively cut interest rates by 25 basis points in anticipation of a major growth hit from both bushfires and the coronavirus, while the US Federal Reserve surprised analysts overnight with a 50-basis-point move.

Treasury has estimated that the bushfires might take 0.2 percentage points from GDP, while the OECD has warned that coronavirus could hit Australian economic growth by at least 0.5 percentage points.

However, economic modelling by former Reserve Bank board member and ANU professor Warwick McKibbin found that the hit to Australian GDP in 2020 from even a moderate coronavirus pandemic would likely surpass 2 percentage points.

These GDP figures for the three months to December 31 pre-date the worst of the bushfire season and also do not include any fallout from the coronavirus outbreak, which was only initially reported at the end of December.

Real estate agent boom

Most economists agreed the composition of economic growth was not very strong.

While the ABS reported a pick up in household discretionary spending, overall domestic demand remained subdued in the December quarter (+0.1pc), with a continued growth in government services boosting GDP.

Westpac's Andrew Hanlan said real estate agents and conveyancers were also doing very well from the housing rebound since June, with ownership transfer costs up 12.3 per cent in the quarter, adding substantially to GDP growth.

"The main upside was the real estate sector jumping at a double-digit pace, adding 0.16ppt for the quarter," he wrote in a note on the data.

"Real estate, +0.16ppts, and inventories, +0.18ppts, largely explained growth in the quarter."

The mining sector was another major contributor to the positive result, with production volumes up 1.6 per cent, even though prices fell in the quarter.

Those were offset by falling business investment and a 3.4 per cent slump in the construction of new homes — the sixth consecutive quarter that dwelling investment fell.

'Risk of a recession has increased materially'

Sarah Hunter from BIS Oxford Economics said the better-than-expected December figures did not eliminate the risk of a recession in 2020.

"Overall, the data confirms that momentum in 2019 was slow and steady (through the year growth was 2.2 per cent). But conditions have clearly changed markedly since then," she wrote in a note on the figures.

"The coronavirus outbreak is putting a substantial strain on the global economy, through disruption to tourism, higher education, global supply chains and financial markets.

"The hit to services exports and emerging disruption in supply chains, coupled with the earlier drag from the bushfires, will likely result in a contraction in Q1 [the March quarter], and the risk of a recession has increased materially."

ANZ's Felicity Emmett agreed it was a "soft" result, with the risk of a recession during the first half of 2020 very real.

"Consumer spending, housing construction and businesses investment all remain very weak," she wrote.

"We expect Q1 [first quarter 2020] GDP to be negative, but given that the recovery looks unlikely to be V-shaped, concerns are rightly growing that Q2 growth will also be negative and that Australia may enter its first recession since the early 1990s."

Stimulus on the way

Treasurer Josh Frydenberg said the annual growth figures showed a slight improvement in the Australian economy at the end of last year, however he acknowledged the March quarter numbers would take a significant hit.

"The coronavirus is impacting on the tourism, education, and export sectors, but also disrupting end-to-end supply chains," he told reporters in Canberra.

"The measures the Government has already put in place are designed to keep Australians safe, and that remains our first priority.

"As the Prime Minister has foreshadowed, the Government is working on a targeted, responsible and scalable series of measures that are designed to keep business in business and Australians in jobs."

Ahead of the Reserve Bank's interest rate cut, Prime Minister Scott Morrison revealed Treasury was working on a stimulus plan that would be announced ahead of May's Budget.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 1 minute 12 seconds 1 m 12 s Prime Minister Scott Morrison on the Government's economic plan for coronavirus.

However, Labor's Shadow Assistant Minister for Treasury Andrew Leigh argued stimulus measures should have been in place months ago.

"All of these things predated coronavirus, they predated that, and put Australia in a troubling position to face down the latest headwinds," he told reporters outside Parliament House.