Australia’s economy is in a cyclical upswing, and the latest quarterly accounts suggest there is more supply capacity than some feared. Public sector programs continue to absorb resources, while consumer spending is not as strong as we thought.
- This week’s national accounts confirm that Australia is in a cyclical upswing that is becoming more broadly based. This is good news: much of the strength is in activities that invest in Australia’s future. Data revisions also imply that supply capacity is better than many observers feared, and more in line with our existing view.
- The bid for resources by the public sector remains robust and possibly overlaps with the needs coming from growing business and housing investment. Consistent with this, the income tax burden on households has returned to high levels. Households are also facing higher petrol prices while the war in the Middle East continues.
- The Q4 consumption data were a puzzle, slower than we or the RBA expected. Some of the miss looks to be noise that reverses next quarter and some may be measurement issues that get revised later. Based on what we know now, though, it seems that the anticipated private sector recovery is more about investment (both business and housing) than consumption. The consumer will be reined in until the current inflation pulse subsides.
Every quarter, the ABS runs the ruler over the economy, and we learn something about the underlying activity pulse, now and in the past. The story is usually a mixed bag of positive and negative news, and some results are simply perplexing. This quarter was no different.
The good
Australia is in a cyclical upswing that is becoming more broadly based. In the quarter, solid growth was seen across a range of both public and private demand. Business investment is looking positive even as the lumpy timing of buying in data centre equipment versus building the actual data centre induces volatility in the components. While the external sector detracted from growth overall, minerals export volumes bounced after a long period of relative stability. Factor in higher commodity prices across many key exports and the income (and tax revenue) boost from this source is material.
This is an unambiguously good thing. Growth had been lacklustre for much of the post-pandemic period, even with the ramp-up in the care economy. And stronger dwelling investment means more housing supply. Overall, we see the composition of recent and near-term growth as being consistent with investing in Australia’s future.
Supply capacity is better than many observers feared. As one of my old bosses used to say, most changes to your view come from revisions to history. His observation was especially pertinent in the Q4 accounts. While growth in the quarter lagged our final estimate, the previous three quarters were each revised up slightly. As well as meaning that our year-ended growth forecast was on the money, the material cumulative revision implies that the inflation seen recently occurred alongside stronger growth than previously understood. This inherently implies that supply capacity was higher and growing faster than previous data releases implied. We have long believed that Australia can grow sustainably faster than 2%; this week’s data is evidence in favour of our view and against the slow-trend hypothesis.
Productivity growth at 1.0%yr (and even higher at 1.5%yr in the market sector as mining productivity bounced back) is well above the RBA’s February forecast. Commentators pointing to the flat quarterly result for productivity growth in Q4 as evidence of ongoing stagnation ignore the prospects for further data revisions in future releases, given their recent pattern. That view also ignores the inherent volatility of these imperfectly measured data, as well as the vagaries of measurement in the non-market sector.
The bad
The public sector continues to expand its share of the economy. While infrastructure spending has been rolling over as projects complete, other realms of public spending remain robust. The ‘handover’ from public to private spending was less complete than we initially thought. This becomes a particular issue if the spending calls on resources that the private sector is also competing for. As we have previously highlighted, much of the private sector investment has been in ‘structural’ areas such as energy transition and data centres that are not simply responses to consumer demand and thus will be resilient to consumer weakness. They also lean heavily on construction capacity that public programs such as Housing Australia and the Brisbane Olympics also seek to draw on.
A large public sector is not inherently bad. Many of the spending initiatives, including on disability and social care, address important needs and create opportunities for the people helped. They have probably supported the labour force participation of others as well. However, all this support must be funded. One of the other features of the Q4 national accounts is that taxation as a share of household income rose over 2025, reversing almost all the reduction from the Stage 3 tax cuts. This is again a material drag on household disposable incomes and spending. Given that many Australian households are very lightly taxed, a rising tax burden on the rest has distributional implications.
Separate to the national accounts, there is a war on. The hostilities in the Middle East have closed the Strait of Hormuz and damaged Qatari LNG production. Global oil prices have spiked and local petrol prices have also risen significantly; we recently released some scenario analysis on how this might play out for inflation and growth in Australia and New Zealand. A key point is that global gas prices as well as oil prices are being affected. There is an export and tax revenue fillip for Australia from this that will cushion the cost shock.
Inflation expectations in Australia remained relatively well anchored through the post-pandemic inflation surge. The RBA even assumes this will continue when it forecasts inflation or assesses the tightness of the labour market. Thus, while it would be nervous, knowing that petrol prices are very salient for household beliefs about inflation, it should be keeping this risk in perspective and not act on a possibility that expectations might lift.
The simply perplexing
A comprehensive, interlinked data set such as the national accounts will always throw up some puzzles. We were surprised that the consumption data were not stronger in the December quarter. Some of the miss was likely noise, relating to weather effects on actual electricity consumption and the mapping from total vehicle sales to sales to households. But there is also a notable gap between our estimates of non-tourism spending offshore, such as online shopping, gaming and gambling, based on customer card spending, and the ABS’s estimates based on other sources. This is an area where the data revisions my old boss used to warn about might come into play at some point.
The bottom line
The anticipated private sector recovery is underway, but it is more about investment than household consumption. The consumer will again be reined in by restrictive monetary policy and rising tax burdens until the current inflation pulse subsides.
