Australia's economic growth figures for the June quarter are due in today's National Accounts release (2/9). Growth slowed in the March quarter (0.3%) and a similar pace is expected in the June quarter. Annual growth is solid at 2.5%, though the underlying momentum in the economy has been materially stronger than this implies, despite the RBA's tightening cycle and the fuel price shock. Domestic demand is running at a 3.5% annual pace - its strongest since late 2022 - as household consumption has remained resilient, while the data centre build out has seen business investment accelerate. Amid these dynamics, inflation surprised to the upside in July, with a further RBA rate hike now expected by year-end.
March quarter recap: Slowdown belies underlying momentum
Headline GDP growth slowed to 0.3% in the March quarter from 0.9% in the December quarter. However, that was driven by net exports (-0.8ppt) and inventories (0ppt) alongside a softer impulse from the public sector (0.1%), belying underlying strength in domestic demand (1%). Annual growth in GDP was steady at 2.5%, while domestic demand advanced 3.5%Y/Y.
The consumer took much of the focus after the fuel price shock amplified cost-of-living pressures, but while discretionary spending was weak (0.1%), household consumption was resilient (0.4%). Business investment, the key driver of growth, is surging (5.7%) to facilitate the data centre build out. Much of the equipment used in the data centre fit out is imported, leading to net exports delivering its largest hit to growth in two years, though weaker exports were also a factor as cyclones hampered port operations in the resources sector.
June quarter preview: Defying the headwinds
Despite trade and geopolitical headwinds, global growth has held up largely due to the AI-related investment boom. In the Gulf, an MOU signed by the US and Iran enacted a ceasefire and helped lower oil prices; however, the agreement failed to provide a durable solution to either ending the conflict or reopening the Strait of Hormuz. Growth across the OECD group was 0.5% in the quarter, with the US, euro area and UK all rising by 0.4%. In China, growth slowed to 0.9%.
Domestically, fuel prices added to existing inflationary pressures and prompted the RBA to continue its tightening cycle with a 25bps hike in May following earlier increases in February and March. This has been a factor behind very weak consumer sentiment, but household spending has defied this backdrop to remain resilient. A key factor was the federal government halving the fuel excise tax for three months from the start of April (later extended for one month at a lower rate), lowering fuel prices significantly.
Rate hikes had a near immediate impact in the housing market, while tax changes to the treatment of capital gains and negative gearing in the May Federal Budget have also played a role. Dwelling prices nationally have fallen by more than 3% in the three months to August. Prices in Sydney and Melbourne are down 4-5%.
Lags in monetary policy transmission mean that the solid momentum residential construction currently has is likely supported by the RBA's rate cuts in 2025. However, with interest rates now on the rise, dwelling prices declining and cost pressures increasing, housing construction faces a challenging outlook. Business investment cooled in the quarter but remains a key growth driver due to the data centre build out.
Key dynamics
Household consumption — Showed ongoing resilience to higher interest rates and weak sentiment, helped by the fuel excise tax cut. Discretionary demand was robust, including in recreation, travel and hospitality.
Dwelling investment — Partial data indicated residential construction activity advanced further in the latest quarter, supported by new home building and alterations. Headwinds to the cycle from declining housing prices, higher interest rates and cost increases are intensifying.
Business investment — Took a step back in the June quarter as equipment purchases were unable to keep pace after surging in the March quarter. However, the outlook remains strong, with investment plans upgraded as the data centre build out continues.
Public demand — Has softened over the past year and rose by a modest 0.3% in the quarter. Government spending lifted 0.6% driven by the non-defence portfolio. Public investment contracted by 0.8% reflecting the winding down of major projects.
Inventories — Broadly neutral for GDP in the quarter. Private non-farm inventories are set to deduct from activity after resources exports recommenced following weather-related disruptions in the prior quarter. This is largely offset by increased public sector inventories.
Net exports — Added 0.1ppt to quarterly GDP, a very modest rebound after its largest reduction to growth in two years in Q1 (-0.8ppt). Exports rose 0.8% driven by a rebound in the resources sector. Imports lifted 0.5%, with vehicle imports (notably EVs) the major contributor.
