The Australian economy expanded by 0.6% in the June quarter, a stronger than expected outturn that was driven by a long-awaited boost from household consumption. Growth lifted from 1.4% to 1.8% through the year, above the RBA's recently downgraded forecast for 1.6%. Pressures from the cost of living and higher interest rates have kept households quiet over the past few years, but there are encouraging signs that a shift is emerging.
Growth in Australia through the first half of the year was 0.9%, a result that compares favourably to other major advanced economies where growth swung on volatility in trade flows and inventories as the US administration pressed ahead with its new tariff regime. Australia has come through this period relatively unscathed, hit with the baseline 10% tariff on Liberation Day while trade with the US accounts for only 6% of the nation's total exports according to DFAT analysis.
The composition of growth was the most encouraging aspect of the June quarter National Accounts. Public demand has been the cornerstone for the past couple of years, but with that now easing the question has been whether the private sector can take up the running. Household consumption moved up a gear in the June quarter, indicating that rising real incomes, RBA rate cuts and earlier tax relief are starting to gain traction; however, this is only one quarter, and growth also lacks the support of business investment and dwelling investment.
Consumption-led growth outpacing RBA forecasts suggests the pace of further rate cuts will be gradual. But there are strong reasons for the RBA to continue its easing cycle. Interest rate settings - prior to the August cut - and tax payments still accounted for an elevated share of gross disposable income (20.9%) in the June quarter. Meanwhile, with nominal GDP running at a 4.1% year-on-year pace compared to growth in real GDP of 1.8%, this is an economy where inflation is in the 2s - consistent with the RBA's target band. Recent commentary from the RBA has placed less emphasis on weakness in productivity growth (0.2%Y/Y) in terms of its implications for interest rate decisions.
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National Accounts — Q2 | Expenditure: GDP (E) 0.5%q/q, 2.0%Y/Y
Household consumption (0.9%q/q, 2.0%Y/Y) — Cautious consumers finally showed signs of loosening the purse strings as household consumption rose at its fastest pace since Q4 2022 after lifting by 0.9% in the June quarter. Year-ended growth picked up from 0.8% to 2%. Cost-of-living pressures and higher interest rates have squeezed households for the past 2-3 years; however, this is tentative evidence that the tide may be starting to turn.
Discretionary spending (1.4%) accelerated by its most in 11 quarters to drive overall consumption growth. The end of financial year sales and new product launches (including the Nintendo Switch 2) supported spending on furnishings and household equipment (1.7%). Meanwhile, tourism-related spending was bolstered in late April as the timing of Easter and the ANZAC day holiday fell in unusually close proximity, allowing many people to take extended leave over this period. This boosted spending on transport services (1.7%), hotels, cafes and restaurants (0.7%) and recreation and culture events (2%). Additionally, vehicle spending rose 2.4% following a gain of similar magnitude last quarter. Essentials consumption rose 0.5% in the quarter on the back of health-related spending (1.9%) amid the flu season.
Household finances are increasingly a tailwind for consumption. With inflation having cooled significantly from its late 2022 peak near 8% to now be within the RBA's 2-3% target band, real disposable income growth rose 4.2% through the year to the June quarter - its fastest pace in more than 4 years. Robust labour market conditions continue to underpin household income, with the effects of RBA rate cuts and the earlier Stage 3 tax cuts also playing a role. As a result, households were a little more willing to spend rather than save, with the household saving ratio seeing its first decline in 12 months falling from 5.2% to 4.2%.
Dwelling investment (0.4%q/q, 4.8%Y/Y) — Strong growth in dwelling investment in the March quarter (2.1%) was unable to be sustained as growth eased back to 0.4% in the June quarter. Growth through the year softened to 4.8% from 5%. New home building activity slowed from 1.7% to 0.4% quarter-on-quarter - its weakest outcome since Q4 2023 - while alterations came close to stalling at 0.3% from 2.8% in the March quarter. Activity in the sector is trending upwards nonetheless, helped by RBA rate cuts as well as easing capacity and cost pressures - legacies from the pandemic that had cast a long shadow.
Business investment (-0.4%q/q, 0.3%Y/Y) — Contracted by 0.4% in the June quarter to leave business investment down by 0.1% through the first half of the year. The earlier upswing from 2022-23 has been cycled, leaving business investment with its weakest momentum since the pandemic struck in 2020.
The completion of renewable energy projects weighed on non-dwelling construction in the quarter (-1.7%) and over the first half of the year (-0.5%). Equipment investment (-0.1%) has been another source of weakness (-1.5% in the first half). Partially offsetting support continues to come from intellectual property products, up a further 1.6% in the quarter to be 6.8% higher through the year.
Public demand (0.2%q/q, 3.0%Y/Y) — Momentum in public demand cooled rapidly over the first half of the year (-0.2%), with subdued growth in the June quarter (0.2%) unable to offset a contraction in the March quarter (-0.3%). Annual growth eased from 4% to 3%. Growth in underlying investment fell by 3.7% in the quarter to be down by 6.7% across the first half. Reduced spending on transport and health-related infrastructure and on defence investment were the key drivers. By contrast, government expenditure remains robust (1%q/q, 4%Y/Y), supported in the June quarter by health-related spending and on staging the 2025 federal election.
Inventories (-0.1ppt in Q2, 0ppt yr) — Inventory levels increased by $1.2bn in the June quarter, below $2.1bn rise in the previous quarter. That change in the change of inventories (-$0.9bn) deducted modestly (-0.1ppt) from quarterly GDP.
Net exports (+0.1ppt in Q2, 0ppt yr) — External trade was effectively neutral for GDP growth in the June quarter and over the past year. Australian trade flows have not been affected to any meaningful degree through the early stages of the US administration's new tariff regime.
Exports lifted by 1.7% in the June quarter (1.5%Y/Y), seeing their fastest rise in 2 years. This came after exports fell in the March quarter (-0.7%) as adverse weather disrupted bulk commodity shipments. In the latest quarter, services (3.3%) drove export growth on a lift in tourist numbers from New Zealand that saw inbound travel accelerate (4.8%). Resources exports rebounded from the earlier disruptions to rise by 2%, their fastest increase since Q2 2022.
A demand-led recovery in the domestic economy was reflected in imports, which rose by 1.4% for the quarter (1.9%Y/Y). The services sector advanced (3%) as demand for offshore travel picked up (3.5%). Meanwhile, consumption goods were also strong (3.5%), with vehicles (6.3%), clothing and footwear (7.2%) and toys, books and leisure goods (7.9%) all featuring.
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National Accounts — Q2 | Incomes: GDP (I) 0.6%q/q, 1.8%Y/Y
The income measure for GDP rose by 0.6% for the June quarter to be 1.8% higher through the year, up from 1.3% previously. Growth in the national wage bill slowed in the June quarter, with the compensation of employees rising by 1.1% - its slowest increase in a year - though the annual pace firmed from 6.5% to 6.7%. The public sector wage bill (2.1%) outpaced the private sector's (0.8%), with costs associated with running the federal election partly explaining the difference. In the private sector, wage reforms in aged care and childcare were a key driver. Improved trading conditions supported rising wages in hospitality.
Corporate profits (non-financial gross operating surplus) eased by 0.1% quarter-on-quarter to be down 4.3% through the year. Falls in commodity prices were the key factor behind the weakness, reflected in the terms of trade that declined 1% in Q2 (-2.4%Y/Y). Margin pressures remain a headwind to firms across many industries. Gross mixed income - small company profits - contracted by 0.9% in the quarter (4.2%Y/Y).
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National Accounts — Q2 | Production: GDP (P) 0.7%q/q, 1.7%Y/Y
The estimate for GDP using the production approach increased by 0.7% in the June quarter, lifting annual growth from 1.2% to 1.7%. Across the industries, those in goods distribution saw the fastest pace of growth (1.2%q/q). Within this, increased demand for air travel saw the transport sector up 1.7%. Stronger consumption demand drove the retail (0.4%) and wholesale (1.5%) industries.
Goods production was up 0.6% for the quarter overall, driven entirely by mining (2.3%), which offset weakness in construction (-0.9%), manufacturing (-0.6%) and utilities (-2%). In mining, production rebounded from the weather-related disruptions in Q1, with gains coming through across iron ore (6.1%), oil and gas (1.2%) and coal (0.8%).
In the services industries, household services led the way advancing by 1.1% in Q2. Increased tourism and stronger demand for dining out led to a 1.9% rise from the hospitality industry. Increased gambling activity drove output in arts and recreation services. Business services lifted 0.4% in the quarter. Here, the strength was in information media and telecommunications (1.8%) - associated with data centres - and finance and insurance (1.1%) as loan books expanded.
