Rapid response - Consumers drive upside surprise in Q2 GDP growth

Australian GDP surprised to the upside in Q2 as consumers were more willing to spend. The outlook for GDP growth is improving as rate cuts support the rebalancing of the economy, reducing reliance on the public sector and supporting the private sector. However, in the short term, profit margins could remain under pressure.

• Q2 2025 GDP rose by +0.6% this quarter and by +1.8% compared to June 2024, according to the ABS’s first estimate published today. This is higher than the consensus estimates of +0.5% and +1.6%, respectively.

• Tom Lay, ABS head of national accounts, said: "Economic growth rebounded in the June quarter following subdued growth in the March quarter, which was heavily impacted by weather events."

• The March quarter GDP figure was revised up from +0.2% to +0.3% and from +1.3% to +1.4% over the full year, helping to lift the full-year performance compared to forecasts.

• Compiled using different methodologies, data sources, and aggregation techniques, over the 2024-25 financial year, GDP grew by +1.3%, marking the weakest annual growth since the early 1990s, excluding the COVID-19-impacted 2019-20 year.

• GDP per capita rose by +0.2% this quarter following a decline in the March quarter 2025.

• In the June quarter, quarterly growth was almost entirely driven by domestic final demand (+0.5%), led by a +0.9% increase in household consumption, which contributed +0.4% to GDP growth. Private investment grew softly, having no impact on GDP growth.

• Compensation of employees (COE) increased by +1.1%. Labour market conditions remained tight with only a slight increase in the unemployment rate to 4.3% by the end of June. COE remained the main source of income for households, although it experienced a softer rise compared to recent quarters, translating to +6.2% growth in 2024-25.

• The household saving to income ratio fell from 5.2% in the March quarter to 4.2%. The rise in gross disposable income (GDI) of +0.6% was outpaced by a rise in nominal household spending of +1.5%. The modest rise in GDI resulted from falls in income receivable from non-life insurance claims and social assistance benefits, following strength in the previous quarter associated with the impacts of ex-tropical cyclone Alfred.

• Discretionary consumer spending (+1.4%) led the growth, with rises across tourism-related categories such as recreation and culture (+2.0%), transport services (+1.7%) and hotels, cafes, and restaurants (+0.7%). The increased spending in tourism was driven by people taking time off from work due to the proximity of the Easter and ANZAC Day public holidays. These categories were further supported by an increase in overseas travel and high attendance at various events.

• Furnishings and household equipment (+1.7%) further strengthened discretionary spending, as households capitalised on end-of-financial-year sales.

• Queensland and New South Wales also experienced stronger sales as consumers replaced items damaged from the extreme weather events of the previous quarter. Essential spending grew by 0.5%, aided by the growth in health (+1.9%), in line with increased use of medical services due to a stronger flu season.

• Electricity, gas and other fuel (+2.9%) rose as electricity rebates reduced across jurisdictions, particularly in Queensland and Western Australia. Reductions in electricity rebates are treated as a shift in expenditure from government to households in the national accounts.

• Public demand had no impact on growth as the rise in government expenditure (+0.2%) was offset by a -3.9% fall in public investment. Public investment was the largest detractor, reducing GDP growth by -0.2%.

• Net trade contributed +0.1% to GDP growth, attributable to increased exports of goods and services (+1.7%), partly offset by a rise in imports (+1.4%). The terms of trade fell as the fall in export prices was only partly offset by the fall in import prices.

• Private non-financial corporations’ gross operating surplus (profits) fell -0.1%, led by Mining, despite strength in production. The decline in profits was largely driven by price falls across iron ore, coal and LNG due to weak export demand and global oversupply. 

• Non-mining industries, including Professional, Scientific and Technology, Information Media and Telecommunications, and Accommodation and Food services partly offset the fall, experiencing higher sales.

Fin-X Wealth View

• The June quarter concludes a weak year for Australian activity growth despite signs that GDP-per-capita is returning to the upward trend, after declining since 2022.

• The sharp decrease in public investment and slowing public consumption expenditure suggest that this year’s growth will be more reliant on the private sector than over the last two years.

• The rebound in household spending, supported by higher employee compensation as well as the recent rate cuts, appears to bode well for future growth. There are some detractors to watch in the fact that consumers have been forced to reduce savings and respond to weather events and higher power bills. In addition, the pick-up in EOFY discounted sales could imply that the strength risks being overstated. Nevertheless, the overall picture is one of a greater willingness of households to spend and easing pressure on household budgets.

• On the other hand, higher compensation underscores the fact that the company margin squeeze visible in S&P/ASX300 results is consistent across the economy, with the mining sector being the most severely impacted, as commodity prices also fell.

• Overall, the report provides more evidence of a healthy rebalancing of the economy after the pandemic. However, the realignment appears to be in the final stages.

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