In review | Australian Q2 GDP: Household revival drives growth

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. 

Australian GDP growth 0.6% in Q2

The Australian economy expanded by 0.6% in the June quarter, seeing momentum lift from a subdued March quarter (0.3%) to outpace expectations (0.5%). Year-ended growth firmed from 1.4% to 1.8%, coming in above the RBA's recently downgraded view (1.6%). This together with household consumption finally showing signs of rediscovering form point to the RBA's easing cycle continuing to proceed at a gradual pace. Inflation is not standing in the way of further cuts either; nominal GDP growth running at 4.1%Y/Y means this is an economy where inflation is in the 2s - consistent with the RBA's target band.   

The key theme in the domestic economy in the June quarter was household consumption picking up to rise at its fastest pace (0.9%) since the December quarter of 2022; finally showing signs of responding to the slowing in inflation, rising real incomes and RBA rate cuts. This largely drove growth as business investment contracted (-0.4%) and dwelling investment was subdued (0.4%). Modest and offsetting contributions meant that net exports (+0.1ppt) and inventories (-0.1ppt) were growth neutral in the quarter. 

The 0.9% lift in household consumption saw year-ended growth rise from 0.8% to 2%, a 2-year high. Discretionary consumption (1.4%) in particular was the key area of strength. This was supported by end-of-financial-year sales, new product launches, and by holiday-related spending due to the close timing of public holidays for Easter and ANZAC day, with events, hotels, cafes and restaurants and transport services benefitting. A reduction in the household saving ratio from 5.2% to 4.2% as well as real incomes rising at their fastest pace in 4 years (4.2%Y/Y) - the result of easing inflation - were key factors behind the lift in consumption growth.  

More to come. 

Australia Current Account -$13.7bn in Q2; net exports 0.1ppt

Australia's current account deficit remained at around 2% of GDP in the June quarter. Export revenue was held flat - despite underlying volumes rising (1.7%) - as uncertainty around global trade caused by the US administration's tariff regime weighed on commodity prices. Expenditure on imports meanwhile rose 0.8% in the quarter. Overseas travel underpinned a pick-up in import volumes (1.4%) while import prices eased (-0.7%). The overall dynamics are broadly neutral for GDP growth in the June quarter, with net exports to add just 0.1ppt.   

Australia's current account - the nation's position on trade and financial transactions with the rest of the world - remained in deficit for the 9th consecutive quarter. Effectively, more capital has flowed out of Australian than has come in over this period - a factor that has contributed downward pressure on the Australian dollar, which in trade weighted terms is down more than 1.5% since the end of the June quarter 2023. In nominal terms, the current account deficit was $13.7bn (around 2% of GDP), narrowing slightly from a deficit of $14.1bn in the March quarter.

Australia actually runs a surplus on its trade in goods and services with the rest of the world, though it narrowed in this latest quarter from $4.3bn to $3.1bn. However, the nation has an income deficit: payments to overseas investors (dividends, interest payments etc) exceed returns earned by domestic investors offshore. That deficit narrowed in the June quarter to $16.8bn from $18bn - a $1.2bn improvement that offset the reduction in the trade surplus, leaving the current account deficit little changed.    

Export revenue was flat at $164bn in the quarter (1.9%Y/Y) - that was despite the volume of goods and services exported rising at a decent clip of 1.7%, its fastest rise in 2 years. Higher volumes were supported by resources (2%), rural goods (1.7%) and services (3.3%) on the back of strong inbound travel (4.8%). However, despite strength in demand for Australian exports, the prices of those exports fell overall by 1.7% in the quarter; declines in commodity prices were a key factor. 

Import spending rose in Q2 by 0.8% to $160.9bn (4.9%Y/Y). That movement was driven by a lift in demand, with import volumes advancing by 1.4% - the strongest increase since Q1 2024 - against a 0.8% decline in import prices. In volume trade, services (3%) was the key driver of strength, with offshore travel up 3.5%. Goods imports lifted 0.8% on the back of consumption goods (3.5%), reflecting import orders for vehicles (6.3%), clothing and footwear (7.2%), and leisure goods, toys and books (7.9%). Non-monetary gold (37.7%) was also a factor amid volatility on global markets.

Following today's report, the ABS has put the contribution from net exports to GDP growth in the June quarter at a broadly neutral 0.1ppt. The US administration's tariffs have led to significant volatility in global trade flows, with resulting impacts on GDP growth. That, however, has not been the case in Australia. 

Australian dwelling approvals down 8.2% in July

Australian dwelling approvals posted a larger-than-expected fall of 8.2% in July, mostly reversing their strong rise in June (12.2%). Approvals were forecast to only come back by 5% for the month. The retracement was all in the higher-density segment (-18.8%) as detached approvals (0.6%) rose for the first time since April. Higher interest rates and capacity pressures within the construction sector are clearly not new headwinds but still seem to be holding back approvals. 

National dwelling approvals came in at 15.8k in July after falling 8.2% from their 34-month high in June (17.2k). Despite this latest result, approvals have seen a turn in momentum after being on the slide earlier in the year. Strength in the higher-density segment has been the key factor, with approvals working their way up to average 16.1k over the past 3 months.   

Detached or house approvals have consistently come in around 9-9.5k per month so far in 2025. By contrast, higher-density approvals have been highly volatile, falling as low as 5.4k in April before surging to a high of 7.8k in June. The available estimates show that the high-rise segment has been the most volatile as approvals for townhouses and in the low-rise segment have climbed.

Alteration approvals show no sign of easing up rising 1.9% to a new record high ($1.25bn) in July. The higher cost of alterations has been a factor in the rise, but the fact that approvals for new dwellings have struggled suggests there has also been a preference shift within the market. More insights on the volume of alteration work will come to hand in Wednesday's National Accounts for the June quarter.   

Australian Business Indicators Q2: inventories 0.1%

Australia's business activity data for the June quarter point to inventories weighing on GDP growth; however, an uptick in sales indicates demand may have rediscovered some form. Meanwhile, details around incomes were on the soft side, growth in the wages bill slowed to 1% for the quarter and company profits contracted (2.4%) on a headline basis.    

In a positive sign for demand in the domestic economy, sales volumes lifted by 0.5% in the June quarter - their strongest rise since the March quarter of 2023. Sales advanced in most categories, with notable gains in consumer-related areas: hospitality 1.7%, arts and recreation 1.3% and retail 0.8%. By contrast, a very weak result came through for construction (-2.6%). 

Amid a backdrop of rising sales, inventory levels were held broadly flat (0.1%) across the quarter. Wholesale (-1.7%) and retail inventories (-0.5%) were run down in Q2. Those declines were offset as inventories in utilities (6.9%) and in the mining sector (4.8%) advanced. Because the change in inventories this quarter was much smaller than in the March quarter (1.2%), the read-through to GDP growth in the June quarter is negative. Private non-farm inventories are expected to weigh on growth by 0.4ppt. The total contribution from inventories to quarterly GDP growth will be known tomorrow when details for public sector inventories are published.   

In terms of incomes, company profits surprised to the downside falling by 2.4% in the June quarter against expectations for a 1.2% increase. Profits were down 3.3% through the year. A different accounting methodology for inventories is adopted in the national accounts however, and if that adjustment is made, company profits overall were essentially steady ticking up by just 0.1% to $127bn (-3.3%Y/Y). 

According to today's report, mining sector profits contracted by 0.5% in Q2 while the non-mining sector saw a 3.5% fall. The impact of lower commodity prices has weighed on mining sector profits that are down 11.6% for the year. Although, non-mining sector profits have been rising in recent years, the pace of growth has been weighed by cost pressures and soft demand.  

Income from wages saw slightly slower growth in the June quarter rising by 1% - though annual growth held steady at 5.8%. The ABS's Labour Force Survey reported that employment growth was actually stronger in Q2 than the previous two quarter, while growth in hours worked was broadly similar this quarter to last. Unsurprisingly, wage incomes over the past year have risen strongest in healthcare and social assistance (10.3%), reflecting the concentration of employment growth in the sector.   

Macro (Re)view (29/8) | Dollar unshaken

Risks to Fed independence went up a notch this week following President Trump's actions to remove Governor Cook, though markets are reserving judgment. The US dollar index was essentially flat over the week, and long duration bonds were also little changed. The curve is steeper overall, with the short end firming in preparation for the Fed's easing cycle to recommence in September.  

Despite US inflation remaining elevated, markets continue to expect a rate cut in September after Fed Chair Powell put increased focus on cooling labour market conditions at last week's Jackson Hole speech. The inflation measures that the Fed uses as its benchmark for its 2% target matched expectations in July. The headline PCE deflator held at 2.6%yr while the core rate (that excludes volatile food and energy prices) rose from 2.8% to 2.9%yr - its fastest since February. Inflation elevated to target - even before the full effects of import tariffs have flowed through to prices - is not expected to hold the Fed back from easing. That is because the labour market showed signs of weakening in July, with the unemployment rate rising to 4.2% on a slowing in hiring. The expectation is that next Friday's nonfarm payrolls report for August will reaffirm an easing labour market; however, if conditions were to rebound then cross-asset volatility would likely spike as the rates outlook is reassessed. 

The account of the ECB's July meeting conveyed that the Governing Council voted to leave rates on hold as policy settings were 'in a good place'. Having delivered a total of 200bps of easing since June last year, the view was that rates were at a 'broadly neutral level'. Holding rates gives the ECB time to assess how the economic conditions unfold, with the outlook for the export-oriented euro area heavily clouded by the US's tariff regime. There is a wide range of views amongst Governing Council members on the skew of risks to the inflation outlook; some see downside risks to inflation, but others judge that inflation could come in hotter than forecast.   

The unanimous decision (9-0) of the RBA's Monetary Policy Board to cut rates by 25bps to 3.6% earlier this month was reaffirmed in the meeting minutes. New staff forecasts prepared for the meeting gave the Board confidence to cut given the outlook was consistent with the RBA's dual mandate for 2-3% inflation and full employment - while keeping the economy on track with those objectives would 'likely require some further reduction in the cash rate over the coming year'. Markets anticipate a further 1-2 RBA rate cuts by year-end, pricing that was broadly unchanged despite an upside surprise in this week's inflation data. 

Headline inflation accelerated from 1.9% to 2.8%yr in July according to the monthly CPI gauge, well above expectations for 2.3% (reviewed here). The various measures of underlying inflation also lifted, the key one being CPI ex-volatile items and holiday travel rising from 2.5% to 3.1%yr. A gap in the timing of electricity rebate schemes was the main driver behind higher inflation in July and will likely retrace somewhat in August. That as well as the RBA's antipathy towards the monthly CPI series meant the data had little impact on rates pricing. Next week's GDP growth figures for the June quarter could however move the dial. My Q2 GDP preview (see here) looks into the key dynamics in the domestic economy ahead of the report, where the focus remains around the emerging recovery in household spending. The growth profile is patchy overall, reflected in a stronger-than-expected 3%q/q rise in construction activity (see here) alongside a weak 0.2% lift in private sector capital expenditure (see here).

Preview: Australian Q2 GDP

The Australian National Accounts will today (3/9) report the nation's GDP growth outcome for the June quarter. Modest growth of around 0.4% is expected for the quarter, which would leave year-ended growth at a lackustre pace around 1.5%. Australia has been relatively unscathed through the initial period of the US administration's tariff regime, imposed with the 10% baseline tariff on a fairly small share (around 6%) of the nation's total exports. The key dynamic domestically is around the propensity of households to spend with inflation cooling, the labour market remaining robust and the RBA now lowering interest rates. Given the recent focus on Australia's weak productivity growth, expect the latest productivity estimates to receive plenty of attention; however, those should have little bearing on RBA policy decisions.    

A recap: Momentum slows in early 2025  

Australian GDP growth weakened to 0.2% in the March quarter, slowing the momentum built up over the back half of last year. Annual growth was steady at 1.3% - barely half its cruising pace. Key dynamics in the March quarter included ongoing caution amongst households and firms holding back spending and investment, public demand unexpectedly slowing, and adverse weather events - notably Cyclone Alfred in south east Queensland - causing major disruptions. Australian exports to the US accelerated as orders of goods such as non-monetary gold and beef were brought forward ahead of the US administration imposing sweeping trade tariffs. However, exports on the whole weighed on growth - unlike in the UK, euro area and Canada where exports underpinned growth in the quarter.   

Over the past year, public demand has overwhelming driven growth. This stems back to the pandemic recovery when spending on public programs (health and aged care) and investment in infrastructure was ramped up by governments at the state and federal levels. The cost of living and higher interest rates have kept households quiet for an extended period, reflected in the saving rate rising to a 2½-year high of 5.2%. Residential construction and business investment - both interest-sensitive areas of the economy - remained soft, with elevated uncertainty around the economic outlook a contributing factor. Net exports have been broadly growth neutral; adverse weather events hampered resources exports while overseas travel supported imports.      

June quarter preview: Resilience as trade headwinds intensify  

Economic uncertainty offshore increased significantly as the US administration announced its new regime of tariffs on its trading partners, later deferred under a 90-day extension. Australia attracted a 10% tariff, the baseline rate imposed by President Trump on Liberation Day. Volatility in trade flows and inventories led to swings in growth outcomes. After contracting in Q1, US GDP growth rebounded in the latest quarter (0.7%) but on the other hand growth slowed in the UK (0.3%), euro area (0.1%) and Canada (0%). 

In Australia, some signs of positivity around the consumer emerged. A clear uptick in household spending was notable over May and June, sparked by sales events and new product launches. This was also assisted by the RBA continuing its easing cycle with a 25bps rate cut in May. Meanwhile, real income growth was boosted by inflation slowing to lows since 2021 at 2.1% year-on-year in headline terms and 2.7% year-on-year on an underlying basis.  

Surveyed business conditions were soft for much of the June quarter but improved late in the period. Ongoing concerns around margin pressures were evident, though labour costs have eased over the past year. Business confidence had been weighed by economic and policy uncertainty but had also shown signs of improvement. 

Key dynamics in June quarter 

Household consumption — Discretionary-related spending lifted household consumption to modest growth in the quarter. Spending on big ticket items including furniture and electronics was supported by mid-year sales and the RBA's May rate cut.   

Dwelling investment — Looks to have lost some of its recent momentum with both the construction of new homes and alteration work slowing in the quarter. 

Business investment — The capex cycle stalled over the first half of the year. Margin pressures and softer demand have weighed on business investment, while uncertainty over the global economic outlook and higher interest rates have also played a role.  

Public demand — Rebounded by a modest 0.2% in the June quarter from a 0.6% fall in the previous quarter. Public spending (1%) continues to be supported by large-scale programs in health care and defence; however, public investment (-3.4%) declined for the second quarter in succession. 

Inventories — Expected overall to subtract 0.2ppt from quarterly GDP growth. Private non-farm inventories are set to weigh by 0.4ppt but public sector inventories will add 0.2ppt to growth.  

Net exports — Added a very modest 0.1ppt to quarterly growth. Export volumes rose by 1.7% in the quarter supported by resources shipments (2%) and inbound travel (4.8%). This outpaced a 1.4% rise in imports where offshore travel (3.5%) was a key driver.