Economists have trimmed their economic growth forecasts as a fall in export volumes is set to have a larger than expected impact on gross domestic product.
Australia's surplus on goods and services slumped 85 per cent, or $2.97 billion, to $543 million in the three months to March, in seasonally adjusted volume terms, the Australian Bureau of Statistics said on Tuesday.
In real terms, exports fell 1.6 per cent in the March quarter and imports rose 1.6 per cent, which will result in a 0.7 percentage point drag on March quarter GDP, to be released on Wednesday.
The market had been forecasting steady exports to detract 0.4 percentage points from March quarter GDP, leading to quarterly economic growth of 0.3 per cent, and an annual rate of 1.6 per cent.
St George senior economist Janu Chan said there is now a chance the economy contracted in the first three months of 2017.
"Consumer and business spending are expected to be soft, dwelling investment contracted in the quarter and net exports will provide a sizeable detraction," she said.
"While we are not forecasting a contraction, there remains a risk GDP will contract in the March quarter.
"Growth will be at best weak, and annual growth will more than likely ease to its weakest since 2009."
The economy expanded by a surprise 1.1 per cent in the December quarter, after the September quarter's 0.5 per cent contraction.
The bulk of the weakness in March quarter exports was a result of bad weather impacting commodities shipments, with exports of non-farm goods, which includes iron ore and coking coal, down four per cent in volume terms.
Buoyant commodity prices led to a 12 per cent increase in export value.
Commodity exports were heavily impacted by Cyclone Debbie in late-March, which caused temporary production stoppages at several Queensland mines and widespread damage to rail lines.
That will likely have a further impact in the June quarter numbers.
The terms of trade on goods and services - the prices of exports relative to the prices of imports - rose 6.6 per cent in the March quarter.
The drop in exports in part led to the current account deficit narrowing by just 11 per cent to $3.11 billion, missing market expectations of a drop in the deficit to $500 million.
"The surprise relative to forecast came through the income account, with quarterly income credits undershooting our forecast by close to $2 billion," JP Morgan economist Tom Kennedy said.
"The drop appears to be driven by a sharp decline in foreign direct investment income."
The worse than expected figures had an immediate impact on the Aussie dollar, which dropped from 74.91 US cents to 74.57 US cents within minutes of their release.
But the local currency recovered to be trading at 74.92 US cents at 1604 AEST, after the Reserve Bank held the cash rate at 1.50 per cent and maintained its expectation that Australia's economic growth rate will increase gradually to above three per cent over the next couple of years.
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