But economists say the moderation in the 1.2 trillion Australian dollar (US$1.0 trillion) economy will be short-lived as firms continue to plan significant investment, especially in the mining sector, while a substantial upswing in commodity prices is already washing through the economy.
The average measure of gross domestic product rose 0.5% in the first quarter of 2010 from fourth-quarter 2009 and rose 2.7% from the year-earlier period, the Australian Bureau of Statistics said.
Significantly, the bureau revised fourth-quarter GDP growth to 1.1% from 0.9%, highlighting a stunning pace of growth through 2009 despite the bleak global backdrop. Economists said it highlights Australia's fortune in being closely linked with Asia, especially China.
The main prop for the economy in the first quarter was the government's national school's spending program, which added 0.9 percentage points to GDP. Consumer demand held up, despite the impact of aggressive interest rate hikes by the Reserve Bank of Australia.
The withdrawal of government grants for first-home buyers in late 2009 also put a dent in the housing sector. Economists said the impact of economic stimulus withdrawal won't have a lasting impact on the economy in 2010.
Sharp increases in coal and iron ore prices, which came into affect in April, are already acting to stimulate growth in the second quarter, economists said.
The RBA announced a pause in interest rate hikes after a policy meeting Tuesday but left open the possibility of a return from the sidelines soon, saying policy settings are only appropriate for the "near-term".
Interest rates have been hiked six times since October 2009, taking the cash rate target to 4.50%.
Still, a cloud hangs over business investment, with the government and the mining sector at war over a proposed "super tax" on profits in the booming sector. Mining companies have threatened to scrap investment plans if the 40% tax comes into effect.