Australian economic growth as measured by gross domestic product fell by 0.5% for the three months ended September, catching analysts by surprise.
Annual economic growth fell to 1.8% when the market expected a 0.1% quarterly fall and annual growth to be 2.2%.
HSBC Australia-New Zealand chief economist Paul Bloxham said it was the first quarterly fall in GDP since January 2011.
The downside surprise was mostly driven by a sharper-than-expected fall in investment, which more than offset a modest rise in household consumption and inventories.
Net exports were a drag in the quarter, as coal consumption was temporarily disrupted.
However, the third quarter results pre-date much of the rise in bulk commodity export prices and a significant rise in export volumes yet to come from capacity already built, he said.
The strong rise in bulk commodity prices was set to support a boost to incomes in the December quarter, he said.
"Timely indicators of business sentiment, retail sales and job advertisements suggest a lift in growth in quarter four. In short, we think this will be a one-off decline and growth will return in the fourth quarter."
National Australia Bank economists said the fall in GDP highlighted lingering risks to the Australian growth outlook.
Growth was forecast to remain well below 3% in the medium term, NAB economist James Glenn said in a research note.
"While the slowdown was relatively broad-based, our assessment is the headline figure is probably overstating the magnitude of the decline in the economy.
"We do not anticipate another negative print in the December quarter."
Thursday’s figures, in conjunction with slowing employment and weaker business conditions, raised the possibility the non-mining recovery had run out of steam earlier than expected, he said.
The NAB remained comfortable with its view the Reserve Bank of Australia would need to cut rates further next year.
The weakness in GDP growth was relatively broad-based in the quarter, as investment, public spending and trade all contracted. Dwelling investment saw a surprise decline in the quarter, largely related to weather disruptions. The extremely elevated construction pipeline suggested an increase in future activity, Mr Glenn said.
Household consumption was the only expenditure component to show positive, albeit with fairly modest growth of 0.4%.
Indications for the future looked mixed. Retail sales had improved in recent months but the NAB Business Survey had shown a clear deterioration in business conditions for retailers.
As expected, mining investment contracted again in the quarter, as seen by another fall in engineering construction. Further falls were still likely in coming quarters.
Resource exports failed to provide an offset — despite the recent strength in prices — with net exports contracting 0.2% from GDP.
Non-mining private investment was more upbeat than expected but it was not a trend extending into investment plans for the year ahead, Mr Glenn said.
Public investment fell, following strong growth last quarter. Given the large infrastructure initiatives under way, that component was likely to remain "lumpy".
The recovery in the non-mining economy had become much less pronounced, although the services sector still appeared to be performing well. NAB estimates of non-farming GDP decreased by 0.2% in the quarter and year-ended growth eased to 2.6%, he said.
The agricultural sector was a clear standout in the quarter, consistent with a bumper grain harvest. Elsewhere outcomes were soft.
Summing up, Mr Glenn said Thursday’s GDP figures painted a more pessimistic picture of the Australian economy than anticipated by the RBA in recent months and the central bank’s annual growth forecasts would need to be revised down substantially.
"The RBA will be questioning whether the non-mining recovery is running out of steam earlier than expected, especially given the similar signal being sent by employment data and business conditions.
"It is possible the impetus to the economy from the exchange rate depreciation between 2013 and 2015 has largely run its course," he said.
The RBA’s forecasts were particularly reliant on solid growth in household consumption and non-mining business investment — both of which were weak in the quarter, he said.
The latest figures suggested the RBA would need to cut interest rates earlier than expected, particularly if house price growth slowed into next year.
Attention between now and the RBA’s next meeting in February would be on whether partial data remained weak, or picked up again, signalling there had just been a temporary mid-cycle slowdown, Mr Glenn said.
