Australia's March quarter GDP growth figures are due in next week'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, the latest in a series of shocks to add to inflationary pressures, led to the closure of the Strait of Hormuz, sending fuel prices soaring. The immediate impact has been more evident on sentiment rather than growth.
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 overall 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 — Moderated over the course of last year, as investment-related spending slowed as major projects neared or reached completion. Government spending continued to remain elevated. Details on Q1's composition are due next week.
Inventories — Details to come early next week. Inventories were broadly neutral for GDP in 2025 (0.1ppt) but added 0.4ppt to growth in the final quarter.
Net exports — Likely to deduct materially from quarterly GDP. Imports rose strongly supported by equipment investment associated with data centre fit outs. Exports were broadly weak.
