The Australian economy expanded by 0.4% in the June quarter, modestly outpointing consensus and growth in the March quarter (0.3%). Over the first half of the year, the economy was resilient to global and domestic headwinds, though momentum was slower than in the back half of last year. Year-ended growth eased from 2.5% to 2.1% but was a little stronger than forecast by the RBA (1.9%).
The conflict in the Gulf was unable to be resolved by the MOU signed by the US and Iran, with energy supply through the Strait of Hormuz continuing to be disrupted. However, global growth held up much better than feared, rising by 0.5% in the June quarter across the OECD. AI-related investment was the key driver of growth, particularly in Asia.
In Australia, growth slowed to 0.7% over the first half of the year, down from 1.4% across the back half in 2025. That largely reflects the shift from the public sector to the private sector as the major driver of growth. Governments are looking to tap the brakes on spending growth in a higher interest rate environment, while projects in the public investment pipeline have reached or are nearing completion.
The data centre build out has had varying impacts on growth. Business investment has accelerated, though that has been partly offset by the ramp in imports required in the fit-out stage, with net exports contributing to the slowdown. But these facilities will support growth as they come on line.
Another key theme has been the resilience of households, though there are plausible reasons for this. The halving of the federal excise tax lessened the impact of the fuel price shock on households, while the RBA's tightening cycle is yet to cycle through household cash flow. A cooling housing market also poses risks to consumption and dwelling investment. Tax changes to the treatment of capital gains and negative gearing in the May Federal Budget is another factor currently impacting the housing market.
From the perspective of the RBA, the June quarter National Accounts will likely reaffirm some of its key judgements. Growth was a little stronger than expected at 2.1%Y/Y, around the pace it sees as the speed limit for the economy given the ongoing weakness in productivity growth (-0.2%Y/Y). Inflationary pressures remaining elevated - the GDP deflator was 3.1%Y/Y - is likely to be taken as a sign that capacity constraints are continuing, if not broadly then in certain areas of demand, such as business investment and housing construction. Domestic demand at 3.1%Y/Y remains well in front of headline growth. Those factors point towards the RBA following the market path in hiking the cash rate further.
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National Accounts — Q2 | Expenditure: GDP (E) 0.3%q/q, 2.0%Y/Y
Growth across the expenditure components was 0.3% in the quarter, matching headline growth. Annual growth eased from 2.3% to 2%.
Household consumption (0.4%q/q, 1.8%Y/Y) — Remained resilient lifting by 0.4% in the quarter and 0.8% across the first half of the year. Robust labour market condtions and the federal excise tax cut on fuel supported consumption. However, cost-of-living pressures, higher interest rates, and global tensions have been headwinds. Annual growth is now 1.8%, its weakest since early 2025.
The Gulf conflict and fuel surcharges weighed heavily on travel, most notably to northern hemisphere destinations where departure numbers fell for the first time since the pandemic. Despite this, discretionary-related spending was still the major driver of consumption growth, rising 1.4% in the quarter (1.7%Y/Y). That came on the back of a 10.3% surge in vehicle purchases during the quarter, with EV sales reaching record highs amid the fuel price shock. Essentials consumption declined in the quarter (-0.3%), with households appearing to limit energy usage (-6%) given the crisis in the Gulf and after government rebates had ended.
Robust labour market conditions - notwithstanding a slight uptick in the unemployment rate to 4.4% in the quarter - continued to support household incomes, underpinning the resilience in consumption. Gross income lifted 1.6% and 6.2% year-on-year. That had to absorb the impact of RBA rate hikes - interest payments rose 10.4% (11%Y/Y) - and higher income tax, up 0.4% (8.1%Y/Y). As a result, disposable incomes rose by a more modest 1.1% in the quarter (5.5%Y/Y).
After adjusting for inflation (the consumption deflator rose 0.6%q/q and 3.1%Y/Y) real incomes increased 0.6%q/q and 2.4% through the year. That outpaces the growth in consumption (1.8%Y/Y) and may reflect the level of caution amongst households implied by very weak sentiment readings. What is clear is that households have been reluctant to reduce saving. The household saving ratio was little changed at 6.5%, in line with its average of the past year.
Dwelling investment (1.6%q/q, 5.8%Y/Y) — The upswing in residential construction activity continued with a 1.6% rise in the latest quarter, lifting annual growth from 4.2% to 5.8%. However, headwinds to the sector are intensifying with higher interest rates, declining housing prices, cost pressures and changes to long-standing tax concessions all in the mix. Softening housing market conditions are weighing on ownership transfer costs (fees associated with housing transations), which fell 5.9% across the first half of 2026.
New home building lifted by 1.7% in the June quarter, working up 6.3% through the year - its fastest pace in two years. However, momentum here was clearly slower in the opening half of the year (1.8%) than in the back half of 2025 (4.4%). By contrast, alterations (1.4%q/q) accelerated through the first half of the year (5.2%).
Business investment (-0.5%q/q, 10.5%Y/Y) — Eased back in the June quarter (-0.5%), unable to advance after surging very strongly in the March quarter (6.2%). Still, annual growth in business investment was unchanged at 10.5% and has been the major driver of economic growth over the past year as the data centre build out has ramped up.
Although non-dwelling construction (3.5%) saw its fastest quarterly rise in 2½ years from ongoing work on data centres and renewable energy and mining projects, that was offset by weakness elsewhere. Machinery and equipment investment moderated from the rise in the previous quarter (14.6%) to be down 5.6%. Meanwhile, cultivated biological resources fell 3.4%.
Public demand (0.2%q/q, 1.9%Y/Y) — The impulse to growth from public demand is soft, having cooled materially over the past couple of years. In the June quarter, public demand rose 0.2%. That was only a partial rebound after declining in Q1 (-0.5%), resulting in a 0.3% contraction over the first half of 2026. In the latest quarter, government spending rose 0.6%, led by non-defence portfolios. Public investment fell 1.3% as major projects continued to wind down.
Inventories (-0.1ppt in Q2, -0.2ppt yr) — Inventory levels increased very marginally in the June quarter ($0.1bn) following a larger rise in the March quarter ($0.7bn). The change between the two (-$0.6bn) saw inventories deduct 0.1ppt from growth in the June quarter. Non-farm inventories fell (-$0.6bn) as exports in the mining sector recommenced following port closures due to cyclone activity in Q1. However, wholesale and retail inventories rose due to strong EV demand.
Net exports (0.1ppt in Q2, -0.8ppt yr) — Net exports added to growth for the first time since the December quarter of 2023, albeit contributing just 0.1ppt to GDP. This result reflected a rebound in exports (0.8%) after falling in Q1 (-1.1%) and imports slowing (0.5%).
Exports were supported by resources (2.5%) after cyclones hampered port operations earlier in the year. Coal exports (11.8%) were the major driver. However, reduced inbound travel amid the Gulf conflict weighed on services (-1.5%). Imports held up to post their 8th consecutive rise. Despite the disruption to global energy supply from the closure of the Strait of Hormuz, fuel imports still lifted by almost 6%, but the major driver was surging vehicle imports, notably EVs (37.6%). Services imports weakened sharply (-4.9%) as Australians shelved overseas travel plans due to the uncertainty and disruption in the Gulf.
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National Accounts — Q2 | Incomes: GDP (I) 0.5%q/q, 2.1%Y/Y
The GDP income estimate increased by 0.5% in the June quarter and 2.1% year-on-year, down from 2.5% previously. Wage incomes continued to be supported by robust labour market conditions, despite some loosening in the unemployment rate to 4.4% from 4.2% in the March quarter. The compensation of employees rose 1.5% quarter-on-quarter and 6% year-on-year. The public sector (1.8%q/q) continued to outpace the private sector (1.4%q/q), with the former boosted by scheduled pay rises to health care workers.
Corporate profits rebounded in the June quarter as commodity prices increased and sales recovered after being disrupted in the March quarter by adverse weather. That drove private non-financial company profits to a 2.5%q/q rise (5.1%Y/Y), more than reversing their 0.9% fall in the previous quarter. Outside the mining sector, professional services and construction were key contributors.
Financial sector profits maintained solid growth rising by a further 2.4% in the latest quarter, increasing by 10.2% through the year, a 3-year high. Expansion in loan books and net interest margins were the key factors. Gross mixed income - small business profits - remained under pressure falling for the second consecutive quarter (-1.5%) to be off 2.9% over the first half of the year. These firms may be suffering from a lack of pricing power, while input costs pressures (including from fuel prices) could also be relevant
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National Accounts — Q2 | Production: GDP (P) 0.5%q/q, 2.3%Y/Y
The GDP production estimate increased by 0.5% in the quarter, while annual growth slowed from 2.8% to 2.3%. Output expanded in 14 of the 19 industries tracked by the ABS.
Business services made the strongest contribution growth in the quarter, rising by 1% and 4.1% over the year. That reflected demand for a range of professional services (2.3%) including engineering, management and AI-related services. The financial sector also contributed (1.3%) amid strong loan demand.
Goods-related sectors rose across production (0.2%) and distribution (0.6%). Production was boosted by the mining sector (1.3%) as output recovered from the weather-related disruptions in the previous quarter. Construction also advanced (0.4%). In the distribution area, wholesalers (0.5%) and retailers (0.2%) benefitted from the strength in vehicle sales. The transport industry was still able to expand (0.9%) despite the fuel price shock.