The Australian economy slowed in the March quarter, as cyclones and the tech-related capex boom saw net exports weigh heavily on growth. Domestic demand, however, picked up to rise by 1% in the quarter - but that was largely before the headwinds from the Middle East conflict and the resulting energy price shock as well as the RBA's tightening cycle had intensified. Real GDP was 0.3% in the quarter, slightly weaker than expected (0.4%) and down from 0.9% in the December quarter. Growth through the year held at 2.5%.
The closure of the Strait of Hormuz following the conflict escalation in the Middle East was the latest shock to the global economy, as oil and energy prices soared in March. Given the timing, the impacts were mainly felt on sentiment, with growth across the OECD having picked up in the March quarter. Meanwhile, growth in China maintained a similar pace to recent quarters.
In Australia, the conflict sent fuel prices up by 33% on average in March. Fuel prices have since fallen after the Federal Government halved the excise tax, but the support is temporary, in effect until the end of June. Meanwhile, the RBA had already raised the cash rate by 25bps in February, and with higher fuel prices increasing the risks to the inflation outlook, the Board hiked again in March and May. Those factors are yet to impact growth but will be headwinds moving forward.
The slowdown in growth from 0.9% to 0.3% in the March quarter was driven largely by net exports (-0.8ppts), and to a lesser extent by inventories and public demand. Household consumption (0.5%) actually saw a slight increase in the quarter, but it was business investment (5.7%) that was the major contributor to growth.
Business investment is on its strongest upswing in well over a decade on the back of the tech- and AI-related capex boom in data centres. The equipment required for data centre fit-outs are import-intensive, driving the negative contribution to growth from net exports.
Risks to the growth outlook are weighted to the downside, with higher inflation and RBA tightening the major headwinds. Weaker demand will help ease the inflationary pressures the RBA has been concerned about, while surging business investment is a positive development in terms of turning the tide on productivity growth. Markets now price any further RBA hikes as a 50/50 call, and not until later in the year.
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National Accounts — Q1 | Expenditure: GDP (E) 0.2%q/q, 2.6%Y/Y
The expenditure GDP estimate rose by 0.2% in the March quarter. Annual growth eased from 2.7% to 2.6% but has doubled in pace since March 2025.
Household consumption (0.5%q/q, 2.5%Y/Y) — Lifted by 0.5% in the March quarter, keeping annual growth at its 2.5% pace. This was a subdued outcome that was boosted by a spike in utilities (11.7%) as government rebates on electricity bills ended. However, it is also true that the rebates contributed to weaker consumption growth (0.4%) last quarter.
The drivers that supported the recovery in household consumption last year, including rising real incomes and RBA rate cuts, were starting to reverse in the March quarter. This was also largely before the fuel price shock hit. Consumption growth was driven by spending on essentials, up 0.8% in the quarter. Aside from utilities, food (0.8%) was boosted by stockpiling due to cyclones, while fuel purchases rose (0.6%) - despite significantly higher prices - amid concerns over supply following the closure of the Strait of Hormuz.
Discretionary demand came close to stalling (0.1%), with cautious households pulling back across clothing and footwear (-0.5%), furnishings and equipment (-0.5%), and alcohol (-0.7%). However, discretionary demand is also being weighed by tobacco sales (-4.6%), with the ABS having difficulties accounting for the rise in demand for illicit products.
As alluded to earlier, key supports for consumption were starting to wane. Growth in gross disposable incomes slowed to a 0.4% in the quarter - its weakest rise in 3 years - weighed by rising income tax liabilities and the RBA's rate hikes in February and March. Households funded the rise in consumption (1.1% in nominal terms) by drawing down on savings. That saw the household saving rate fall from 7% to 6.2%.
Inflation based on the household consumption deflator was 0.6% (3.1%Y/Y), implying that real incomes contracted by 0.2% in the quarter - their first decline since Q2 2024. Over the past year, household consumption (2.5%) has outpaced real incomes (1.9%).
Dwelling investment (0.7%q/q, 3.5%Y/Y) — Residential construction activity increased by 0.7% in the quarter, but annual growth slowed from 5.1% to 3.5%. New home building weakened (-0.8%) for the first time since the final quarter of 2023, slowing its upswing (3.5%Y/Y). Adverse weather may have played a role, but industry reports indicate that capacity pressures are again an issue. Weakness in home building was offset by rising alteration work (3.2%). The outlook for the sector is complicated. Population growth is underpinning strong demand, but cost pressures and RBA rate hikes are headwinds to bringing supply forward.
Business investment (5.7%q/q, 10.4%Y/Y) — Business investment surged by 5.7% - its fastest quarterly growth since 2012 - delivering the key contribution to economic growth in Q1. Annual growth accelerated from 4.5% to 10.4%. The tech- and AI-related capex surge in data centres is generating the strongest cyclical upswing in business investment since the mining boom in the early 2010s. Just as the mining investment boom was concentrated in certain states (Qld and WA), the data centre build-out is occurring in New South Wales and Victoria.
The fit-out of data centres saw equipment investment rise rapidly by 14.7% in the quarter, its strongest increase since 2002. Over the past year, equipment investment rose by almost 23%, overtaking non-dwelling construction as the largest component of business investment. Non-dwelling construction was flat in the quarter, as a rise in building work (2.7%) was offset by a decline in the engineering segment (-2.5%).
Public demand (0.1%q/q, 2.4%Y/Y) — Moderated to a 0.1% rise in the quarter, after rising strongly through the back half of last year (1.9%). A 0.2% decline in government expenditure - its first in over 4 years - drove the slowdown. That largely reflected a fall in spending by state and local governments (-0.8%) as electricity rebate payments wound down. Public investment rose by 1.1% in the quarter, bolstered by national defence spending.
Inventories (0ppt in Q1, 0ppt yr) — Total inventory levels rose by $0.7bn in the March quarter after a $0.9bn increased in the December quarter. The change between the two was minimal (-$0.2bn), resulting in inventories having no impact on growth in Q1. Nonfarm inventories rose sharply ($1.5bn) on the back of the mining sector ($1.8bn) as cyclones hampered exports. That was offset by large fall in public sector inventories (-$1.9bn) due to exports of non-monetary gold.
Net exports (-0.8ppt in Q1, -1ppt yr) — Imports rose by 2.1% and exports declined by 1.1%, resulting in the largest reduction to quarterly growth from net exports (-0.8ppt) in two years. The increase in imports (7.8%Y/Y) is being driven by the data centre investment surge, with ADP equipment up almost 90% in the quarter alone. Services imports (3.8%) also expanded as a stronger AUD supported offshore travel.
Exports fell by 1.1%, seeing their first decline since Q4 2023. That mainly reflected weakness in resources (-2.2%) after cyclones disrupted shipments to offshore markets. Lower overseas arrivals weighed on domestic tourism and education.
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National Accounts — Q1 | Incomes: GDP (I) 0.3%q/q, 2.4%Y/Y
The income approach to GDP produced estimates of 0.3% and 2.4% for quarterly and annual growth respectively. Developments around incomes were somewhat mixed. Although there has been some loosening of conditions, the labour market remains robust and continues to support wage incomes. However, in the corporate sector a combination of commodity price falls, weaker demand and cost pressures weighed on profits.
Wage incomes measured by the compensation of employees lifted by 1.2% in the quarter, a solid rise but still its slowest increase in almost two years. Annual growth softened from 6.3% to 5.9%. Key wage rises in the private sector (1.5%) were seen in professional services, construction, and administration and support. Public sector wages were flat in the quarter.
Corporate profits were unable to extend recent increases, declining by 0.4% in the quarter (3.9%Y/Y). Although profits by financial corporations increased (2.4%), as the RBA's rate hikes in February and March supported deposit growth and lending margins, profits in the non-financial sector declined (-1.1%).
Weaker demand and oversupply weighed on iron ore prices, while cyclones hampered coal producers, these factors combining to see mining sector profits fall. Meanwhile, higher costs and slower demand were headwinds in the hospitality industry. Gross mixed income - small business profits - were also under pressure (-0.6%).
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National Accounts — Q1 | Production: GDP (P) 0.3%q/q, 2.6%Y/Y
Quarterly GDP under the production approach lifted by 0.3% and 2.6% over the year, up from 2.5% previously. Growth was driven by services-related industries, while output across goods-related industries was weak.
Output in business services advanced by 1.2% to be up 3.6% through the year. Key contributors in the March quarter were professional services (1.6%) - reflecting demand for engineering and IT services - and administration and support (1.5%), led by events management services. Household services rose a modest 0.2% (2.4%Y/Y). Gains from education and training (0.5%) and other services (1%) were moderated by weakness in hospitality (-0.4%) and arts and recreation (-0.1%) as demand for dining out and gambling eased.
Goods production fell 0.2% in the quarter (2.5%Y/Y). The main driver of the decline was the mining industry (-1.5%) where output fell sharply due to Cyclone Koji hampering coal production. This was partially offset by increased output in manufacturing (1.2%) and construction (0.9%). Goods distribution was also soft, down 0.1% quarter-on-quarter (2.3%Y/Y). The transport sector declined, as freight services were impacted following the weather-related disruptions that held back resources exports. However, both wholesale (1%) and retail trade (0.2%) lifted.
