Rapid Response - Australian GDP growth peaking, while the Fair Work awards keep rate rises on the table

Despite the headline miss, the Q1 GDP report contained more positive details. The gradual decline in GDP growth would have been welcomed by the RBA. But yesterday's Fair Work announcement complicates the rate outlook.

• The Australian economy grew by +0.3% in seasonally adjusted real terms, according to the ABS today. Economists had expected a slightly higher +0.4%, but Q4 2025 was also revised +0.1% higher to +0.9%, offsetting the quarterly undershoot.

• Annual real GDP growth was +2.5%, the same as in Q4 2025 after a -0.1% downward revision.

• In nominal terms, GDP rose +0.6% during the quarter, decelerating from +6.1% yoy in Q4 to +5.3% yoy.

• The terms of trade rose by +1.1% in the March quarter and +0.2% over the year.

• GDP per capita declined by -0.1% in Q1 but increased by +1.0% over the year.

• Productivity increased by +0.3% yoy, and real unit labour costs rose by +0.5% yoy.

• Private demand was driven by private investment (+0.7%) followed by household consumption (+0.3%).

• Public demand did not contribute to GDP growth as a rise in public investment (+0.9%) was offset by a decline in government consumption (-0.2%).

• Changes in inventories did not contribute to GDP growth during the quarter.

• Gross value added (GVA) rose in 14 out of 19 industries. GVA grew by +0.3% overall, driven by business services with ongoing demand for engineering design and IT consultancy, and increased data centre operations.

• Gross operating surplus (GOS) was flat (0.0%). Private non-financial corporations GOS fell -1.1%, led by Mining with decreased prices and sales volumes, particularly for iron ore and coal. Non-mining GOS rose, driven by Construction, Information Media and Telecommunications, Wholesale Trade and Manufacturing.

• Compensation of employees (COE) increased +1.2%, led by the private sector (+1.5%). Labour market conditions remained tight with the unemployment rate (4.3%) rising slightly by the end of March. Hours worked grew +0.9%.

• Household spending rose +0.5% qoq. This growth includes elevated spending on electricity, gas, and other fuels (up +11.7%) as government rebates ceased, raising households' out‑of‑pocket expenditure. Household spending on essential goods and services increased by +0.8% qoq, while discretionary spending rose by just +0.1% qoq.

• The household savings ratio slipped from +7.0% to +6.2%, with the growth in gross disposable income (+0.4%) outpaced by the rise in nominal household consumption (+1.1%).

• Net trade detracted -0.8% from GDP growth due to a fall in exports (-1.1%) and a rise in imports (+2.1%).

• Grace Kim, ABS head of National Accounts, said: "Economic growth slowed in the March quarter, with modest household and public sector expenditure as well as cyclone disruptions to mining and export activities.” Private business investment rose +6.0%, driven by a +16.3% increase in machinery and equipment (M&E). “M&E investment recorded the largest rise in 30 years with the expansion of data centres in New South Wales and Victoria during the quarter. The contribution of investment to GDP growth was moderated as most of this equipment was imported,” Ms Kim added.

• S&P/ASX200 8,789 +0.7%, AUDUSD 0.7171 +-0.1%, Aus 2yr 4.58% +2bps, Aus 10yr 4.89% +1bp

Fin-X Wealth View

• Public demand is slowing and seems likely to continue on this trend following the May federal budget.

• In the second half of 2025, the economy was rebalancing to be driven increasingly by private demand. The +0.9% contribution from private demand suggests that the trend has continued, but was offset by the distortions in net trade.

• Overall, the report was better than the headline suggests, with business and consumer spending contributing, though most of the growth in household spending was on essentials.

• Less positively, the pace of annual real GDP growth has likely peaked at a downwardly revised +2.5%, with higher energy import costs, slowing household spending, and softer public demand all suggesting that growth should decelerate.

• The report would likely have been well-received by the RBA. Growth was not slowing sharply heading into Q2, and indicators such as subdued household spending and a rise in unemployment to 4.5% suggest that the perceived excess demand was dissipating. This would suggest there would have been no urgency to raise rates again.

• However, yesterday's +4.75% increase in FY26-27 minimum wages would have come as an unwelcome surprise. Another rate rise now seems more likely, with the timing and magnitude influenced by the trajectory of oil prices. With a Middle East ceasefire still proving elusive and inventory levels continuing to fall, the risks are likely skewed towards higher rates. That is, unless job losses accelerate or there is a negative shock to global growth, neither of which can be ruled out.

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