Australia's trade balance returns to surplus in April

Australia's trade balance moved back into surplus in April ($1.8bn), after slipping into deficit for the first time in 8 years in March (-$1bn). Exports accelerated at their fastest pace (7.2%) since mid-2022, driven by the major commodities. That far outpaced a modest lift in imports (0.8%). Higher oil prices amid the blockade in the Strait of Hormuz saw the cost of fuel imports surge, but the capex boom in tech-related equipment eased.  

The trade balance swung from a small deficit in March (-$1bn) to a small surplus in April ($1.8bn). Across the past 3 months, the trade surplus averaged $1.9bn - its lowest since July 2018 - continuing the downward trend of the past few years.  

Total exports rose by 7.2% - their fastest increase since June 2022 - to come in at $47.2bn. That saw annual growth rise to 10% from -1.9% in the year to March. The major driver of this strength came from an 11% acceleration in non-rural goods exports ($33.6bn). This reflected strong gains across the key commodities: iron ore 18.5%, coal 15.2% and LNG 2%. Details from the relase indicated these gains were linked to a step up in export volumes, rebounding weather-related disruptions, as highlighted in yesterday's National Accounts (see here).  

Imports were held to a 0.8% rise in April, in at $45.4bn for a 12-month increase of 18%. Higher oil prices due to the Middle East conflict led to fuel imports surging by a further 41.4% in April after an even larger increase in March (53.6%). Over these past two months, the cost of fuel imports has more than doubled, up 117.1%.  

Capital goods pulled back (-16.4%) after rising strongly in March (29%). The main driver was a slowdown in ADP equipment, falling 41.7% following a more than 170% surge to facilitate the data centre build-out last month.

In review | Australian Q1 GDP: Net exports weigh capex surge

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.

Australian GDP growth 0.3% in Q1

Australian economic growth slowed from 0.9% to 0.3% in the March quarter, just short of the 0.4% consensus forecast. Headwinds to the economy from the Middle East conflict and RBA rate hikes are barely reflected in today's figures, with the slowdown being driven by a large drag from net exports (-0.8ppt). That was the byproduct of rising imports (2.1%) associated with capex boom in data centres in tech- and AI-related industries, seeing business investment (5.7%) surge at its fastest pace since 2012.   

The March quarter National Accounts largely reflect conditions prior to the fuel price shock and before the RBA's tightening cycle gathered speed. GDP growth was 0.3% in the quarter, well down from the December quarter (0.9%) but enough to hold annual growth at 2.5%. 

Amid that backdrop, domestic demand was robust, lifting by 1% in the quarter and up 3.5% through the year, its fastest pace in 3 years. That was achieved despite growth in public demand (0.1%q/q) cooling over the past year (2.4%). Private demand (1.3%q/q) took up the running (4%), driven by a recovery in household consumption (2.5%) and surging business investment (10.4%).

In the latest quarter, business investment (5.7%) was the major driver of growth. Servers and processors needed for the fit-out of data centres saw equipment and machinery investment accelerate by nearly 15% - its fastest increase since 2002. 

Household consumption (0.5%) was a little stronger than expected, though that was partly due to electricity rebates ending. That saw household spending on utilities increase sharply (11.7%), while state government expenditure fell (-0.8%). More broadly, there are reasons to be cautious around the consumer. Real incomes were already going backwards slightly (-0.2%) before fuel prices surged and as the RBA continued to hike rates. The saving rate was also falling, down from 7% to 6.2% in the quarter. 

The 0.8ppt drag from net exports was its largest hit to quarterly growth in two years. As highlighted, sharp growth in imports (2.1%q/q, 7.8%Y/Y), which subtracts from GDP, has been driven the tech- and AI-related capex boom. Meanwhile, exports fell in the quarter (-1.1%) as cyclones hampered resources exports to offshore markets. 

More to come. 

Australian dwelling approvals fall 3.4% in April

Australian dwelling approvals fell a further 3.4% in April, exceeding the 1.5% decline expected, after plunging 10.5% in March. Approvals for houses (-0.9%) and units (-7.2%) fell, though both segments have risen strongly over the past year. The outlook for housing construction faces several uncertainties relating to the impact of the RBA's hiking cycle, cost pressures, and the tax changes announced by the federal government in the May budget.   

Dwelling approvals declined by 3.4% in April to 16.7k, their third decline in the first four months of 2026. But despite that, approvals are still trending higher, the 3-month average was 17.8k - its highest since October 2021. That was due to a very strong rise of more than 30% in February. 

House approvals posted their first fall (-0.9%) in 6 months, easing to 10.2k - but still up by 6.8% over the year. The result can largely be attributed to a decline in NSW where house approvals were down by almost 14%. 

In the unit segment, approvals fell by 7.2% in the month to 6.5k. Notwithstanding several large falls in recent months, these approvals have risen by 16% over the year. Approvals on a 3-month average basis have been gently rising across most dwelling types, including high-rise.  

Alteration approvals declined by 2.5% in the month to $1.3bn, up 10.5% over the year. Construction data through the March quarter showed that demand for alteration work increased solidly, expected to be confirmed in tomorrow's National Accounts.  

Australian Q1 GDP indicators

The ABS released several key reports this morning, ahead of tomorrow's March quarter GDP figures in the National Accounts. There were no major surprises; however, the details for inventories, trade and public demand were on the weaker side of expectations. That points to some downside risks to market forecasts for quarterly GDP growth of around 0.5%.  

Starting with the Business Indicators report, private sector inventories increased by 0.5% quarter-on-quarter but fell slightly through the year (-0.3%). Based on that result, estimates suggest that private non-farm inventories will add 0.2ppt to quarterly growth. However, public sector inventories (reported in a separate release) weighed on GDP by 0.3ppt, indicating that total inventories were a small drag (-0.1ppt).  

Business profits fell overall by 1.3% in the quarter (and by 1.5% on an inventory adjusted basis). That, however, was heavily impacted by the mining sector (-9.1%), after several cyclones in Western Australia disrupted operations. Profits excluding mining were up 3.6% for the quarter and 6.1% through the year. 

That reflected a backdrop of resilient demand - sales volumes ex-mining rose by 0.7% in the quarter (2.6%Y/Y) - but at this stage the fuel price shock and RBA rate hikes had barely hit the sides of households. Businesses also face margin compression from these same headwinds.   

Turning to international trade, net exports are expected to deduct 0.8ppt from quarterly growth, its largest hit to GDP in two years and larger than the 0.5ppt drag expected. Import volumes rose 2.1% in the quarter (deducting from GDP), while exports slipped 1.1% (also weighing on GDP) to post their weakest quarter since the end of 2023. Solid growth in exports through much of last year was derailed by weakness in resources exports (-2.2%), again noting the impact of cyclones that hit Western Australia. 

Imports lifted on the back of a 6.3% acceleration in capital goods, which follows an even larger rise of 8.7% two quarters ago. That has been driven by the tech and AI-related investment boom in data centres. The critical infrastructure that powers data centres has seen ADP equipment (yellow line in chart below) more than double over the past year (136%). 

Meanwhile, the current account has continued to deteriorate - not necessarily a concern given the surging investment backdrop discussed above, while the energy shock should boost Australia's terms of trade moving forward. But this also comes alongside an outlook for fiscal deficits well into the future in the recent federal budget. The current account deficit increased from $23bn to $27.1bn in the March decade, around 3.7% of GDP to be a decade-high wides. 

The underlying trade balance recorded its first deficit since the final quarter of 2017, albeit a razor-thin one at $2.4bn. Import spending rose 0.8% in the quarter, while export revenue fell by 1.2%.  

Lastly, public demand was broadly neutral from a growth perspective in the March quarter. Government spending was 0.2% down on the previous quarter, dragged down by state and local governments (-0.8%). However, new investment (excluding asset transfers) rose by 1.1% in the quarter. 

Source: ABS

Macro (Re)View (29/5) | Light at the end of the strait

Progress towards the agreement of a 6o-day extension to the ceasefire in the Middle East that also allows for the reopening of the Strait of Hormuz helped support broader risk sentiment this week. WTI crude futures (June) closed the week below US$90/bbl, a low since mid April. Increasing optimism towards a more concrete de-escalation has helped the USD rise by around 1% over the month of May. Bond yields continued to decline this week.   

 

In Australia, RBA rate-hike pricing eased further as household spending and inflation data surprised to the downside in April, adding to last week's soft labour force report. Markets are now weighing up whether the RBA will hike the cash rate (4.35%) again this cycle, having previously priced the key rate rising as high as 4.85% only a few weeks ago. Household spending declined by 1.1% in April, its weakest month since late 2023. This was heavily impacted by transport-related spending (-4.7%), reflecting signs of demand destruction in travel and tourism due to higher airfare costs (see here). 

Households, however, received some respite as the cut to the fuel excise tax from April 1 saw fuel prices (excluding diesel) fall between 9-10% compared to March. That was the key factor as headline CPI slowed from 4.6% to 4.2%yr (see here). Next week's National Accounts will provide a snapshot of conditions prior to the Middle East conflict. Although the conflict impacted sentiment, GDP growth is likely to have been relatively unscathed, partly during to surging tech-related capex (see here). My preview of the March quarter National Accounts is available here. 

The outlook for US rates to remain on hold was largely unaffected by a slightly below consensus print for the core PCE deflator - the key inflation gauge for the Fed - in April. Core PCE inflation rose 0.2%m/m, its slowest increase in 5 months, but the annual pace lifted from 3.2% to 3.3% - remaining well above the 2% target. Historically weak consumer sentiment - not always reliably correlated with spending - could be weighing at the margin. Personal spending slowed to a 0.5% rise in April, halving from the prior month and was broadly flat (0.1%) in real terms. The energy shock is squeezing real incomes again, with households likely moderating consumption. The key to the outlook is likely to come down to the duration of the shock. 

In Europe, the ECB's account of the April meeting gave every indication the Governing Council is on track to hike in June, reaffirming market pricing. Key lines were that officials judged that 'maintaining price stability might necessitate tighter monetary policy' and that the main focus was shifting towards 'the most appropriate timing for a rate increase'. The BoE in the UK is taking a more cautious approach, given concerns over the labour market. A speech from Governor Bailey noted that tolerating above target inflation was a justifiable trade-off amid uncertainty over the conflict and economic weakness. That tolerance, Bailey noted, would wear thin if signs of second-round effects on prices and wages more broadly emerged.  

Preview: Australian Q1 GDP

Australia's March quarter GDP growth figures are due in today's National Accounts release (3 June). Annual growth rose strongly to reach 2.6% in the December quarter, with consumer spending and private investment driving a recovery from cycle lows in mid 2024. The strength of the recovery ultimately played a role in the RBA hiking rates in 2026, given the Board's view that above target inflation was partly the result of excess demand amid broader capacity constraints. The Middle East conflict and closure of the Strait of Hormuz was the latest in a series of global shocks that have added to inflationary pressures, as fuel prices soared. The immediate impacts have been more evident on sentiment rather than growth. Still, growth is expected to have moderated to around 0.3% to 0.5% in the March quarter on the back of softer household demand. Business investment in the tech sector will be the standout. 

December quarter recap: Domestic demand drives recovery 

Australian economic growth was 0.8% in the December quarter, an above consensus outcome after rising by 0.5% in the September quarter. A domestic demand driven recovery led by household consumption and private investment lifted annual GDP growth from 2.1% to 2.6% - a sharp increase from cycle lows from around a year earlier (0.8%).  

Despite cooling in the December quarter, household consumption was the major driver of growth in 2025. Growth was broadly based across discretionary and non-discretionary consumption, amid a supportive backdrop of rising real incomes and RBA rate cuts. A pick-up in private investment was also key to the recovery. Business investment accelerated over the year boosted by capex spending associated with the construction and fit-out of data centres. Meanwhile, residential construction also played a role, driven by increased activity in new home building. 

March quarter preview: Headwinds to come 

The Middle East conflict and resulting energy price shock, the defining event in the March quarter, is yet to impact global growth. The OECD estimated growth across the group lifted slightly to 0.4% in the quarter, up from 0.2% in the December quarter. Growth picked up in the US (0.4%), UK (0.6%) and Japan (0.5%), while it slowed in the euro area (0.1%). In China, growth was 1.3%, a similar pace to recent quarters. 

Domestically, sentiment was heavily impacted by the conflict and higher fuel prices. The RBA hiking rates in February and March also contributed to this. Still, household consumption appears to have held up in the quarter but likely only increased modestly. Business investment may eventually be impacted by the increased global uncertainty, but in the meantime equipment spending associated with data centres surged. However, these orders are usually import-intensive, so the overall impact on growth is likely to be moderate, as imports weigh on GDP.      

Key dynamics 

Household consumption — Carried softer momentum into 2026 after coming in weaker than expected in the December quarter (0.3%). The ABS's spending indicator pointed to fairly modest growth in consumption volumes. RBA rate hikes in February and March and the fuel price shock were headwinds to households. 

Dwelling investment — The strong momentum in residential construction activity seen over the back half of last year appeared to cool in the March quarter. New home building declined, though that will be offset somewhat by increased alteration work.  

Business investment — Surged higher on the back of the tech-related capex boom. Investment in data centres continued to ramp up, underpinning growth in equipment spending and non-residential construction. 

Public demand — Broadly flat in the quarter (0.1%), with spending declining (-0.2%) but offset by a lift in new investment (1.1%). The unwinding of electricity rebates weighed on spending at the state government level. 

Inventories — Private non-farm inventories contributed 0.2ppt to growth, the mining sector playing a key role after cyclones derailed resources exports. This will be fully offset by public sector inventories (-0.3ppt).

Net exports — Deducted a material 0.8ppt from growth. Imports were boosted by equipment purchases associated with data centre fit-outs. Exports were hampered by adverse weather that held back resources shipments.