Australia's economy shrank for the first time in over five years last quarter as businesses, consumers and government all cut back on spending, an unexpected blow that will challenge policymakers' optimism for growth. 

The Australian Bureau of Statistics said that the country's gross domestic product (GDP) fell 0.5% in the third quarter, from the second when it rose a revised 0.6%. 

That was the first contraction since early 2011 and only the fourth since the country's last recession in 1991. 

The value of all goods and services was 1.8% higher than the same quarter last year, pulling back sharply from around 3.1% in the second quarter. 

Business investment was the biggest drag with miners still unwinding a decade-long spending boom, while home building retreated after a very strong run. 

The contraction was a major embarrassment to the conservative government of Malcolm Turnbull which won an election in July on a promise of delivering growth and jobs. 

It was also chastening for the Reserve Bank of Australia (RBA) which has recently been sounding more upbeat on the economic outlook. 

The bank conceded growth would slow when it held rates at 1.5%this week, but also predicted an eventual pick up.