Australian National Accounts December 2025: A demand pick up the economy can’t absorb

In brief:

• Gross Domestic Product (GDP) increased by 0.8 per cent in the December quarter and 2.6 per cent over the year.
• Both public and private demand contributed to growth, while net trade detracted from growth.
• Price pressures persist across the economy limiting potential growth rates given capacity constraints.

Australia was powered at the end of 2025 by investment in data centres, while beef exports surged and the AC/DC, Metallica and Oasis concerts plus the Ashes tour boosted hospitality and transport.

Other strong contributors to growth in GDP were high levels of investment in aircraft, while apartment building picked up and State and Federal Governments continued to spend on infrastructure and defence. Volatility in inventory levels likely added some growth in December which was mostly a reversal of the September quarter’s weakness, but overall domestic sources of demand were solid.

Net trade detracted from growth because imports rose faster than exports. Demand for new smartphones was part of the reason for strong imports, while lithium batteries also bumped up the numbers in response to the Federal Government’s home battery rebate offer. High iron ore prices, and the record gold price plus increased activity towards the end of the year, after previous shutdowns, boosted mining profits, contributing to the income measure of activity. This is a windfall gain that will also boost tax collections from the corporate sector, helping the budget bottom line.

The annual GDP growth rate of 2.6 per cent is akin to that which Australia experienced in the decade before the pandemic. But the problem this time, is that it has come with high inflation.

That’s because the economy has breached its potential growth rate. The fall in the unemployment rate to 4.1 per cent, plus the pick up in measures of capacity utilisation are signs of the same. The result was stronger than both the median market expectation and the Reserve Bank’s forecast which had only been updated in February.

As 2026 has rolled around, the Reserve Bank has already had to put the brakes on with a 25 basis point rate hike and will continue to slow things down until demand growth falls enough to meet the economy’s constrained supply potential.

In recent days, the problem has been complicated by Middle East conflict lifting oil and likely domestic petrol and transport prices, bringing a new source of inflation, albeit possibly temporary.

The economy’s lack of capacity is proving to be a dampener on consumers who had been enjoying recovering income and higher spending growth. The only way to fix the current predicament is with a pick up in investment, innovation and a lift in productivity.

Labour productivity was better than in recent years in the National Accounts, with a 1 per cent lift over the 12 months to December. There have also been more optimistic capital expenditure expectations in recent data, which should be a precursor to greater business investment. However, it will be necessary for this improvement to persist and for the broader economy to demonstrate tangible evidence that investment and innovation are improving the supply side of the economy before the initial signs can be relied upon.

The National Accounts highlight the need for the Government to move forward with its productivity agenda in the upcoming 2026-27 Budget.

Household consumption growth remained elevated  

Household spending growth remained elevated in the December quarter due to the strong labour market, interest rate cuts throughout 2025 and the wealth effect, mainly from house price gains. Household consumption rose by 0.3 per cent in the December quarter, making a 0.1 percentage point contribution to growth. In annual terms, household consumption increased by 2.4 per cent, slightly below the 2.6 per cent rate recorded in the September quarter.

Households lifted spending on discretionary items, which rose by 0.4 per cent in the quarter, boosted by Black Friday sales, major sporting events and concerts. Essential spending rose by 0.2 per cent in the December quarter as consumers spent more on health due to an extended flu season. This was partially offset by higher government electricity rebates, which are recorded as government expenditure.

The household saving ratio rose for the second consecutive quarter, reaching 6.9 per cent in the December quarter. The amount of disposable income that households saved was the highest since the September quarter 2022 and above the 10-year pre-pandemic average of 6.2 per cent.

The recovery in consumer spending has been supported by higher disposable income, driven by higher wages and non-life insurance payouts. However, tax payable less social assistance benefits as a share of disposable income remained elevated at 11.9 per cent in the December quarter, which continues to weigh on household consumption. The impact of inflation on real wages and higher interest rates is expected to limit the recovery in household consumption over the next year, as indicated by the recent fall in consumer sentiment.

Uplift in new house building increased dwelling investment as real estate turnover soared

Dwelling investment rose by 0.6 per cent in the December quarter but made no contribution to growth, as strength in new house building was partially offset by lower alterations and additions activity. Over the year, dwelling investment growth moderated to 5.5 per cent, from 6.3 per cent in the September quarter. New house building rose by 1.1 per cent in the quarter, driven by increased construction of apartments along the eastern states, and was 6.0 per cent higher over the year. While alterations and additions fell by 0.3 per cent in the quarter, it was 4.6 per cent higher over the year.

Ownership transfer costs rose by a strong 4.5 per cent, contributing 0.1 percentage points to growth, as activity in the property market continued to increase, with high interest from property investors. Ownership transfer costs rose by 12.2 per cent in annual terms, the highest since December quarter 2021.

Dwelling investment as a share of nominal GDP remained at 5.4 per cent, broadly in line with the 20-year pre-pandemic average. Higher construction costs and interest rates are likely to constrain future growth in dwelling investment. Dwelling approvals fell by 7.2 per cent in January, following a 14.9 per cent decline in December, and are at the lowest level since June 2024.

Annual productivity growth has picked up but unit labour costs remain elevated

Hours worked rose by 0.7 per cent in the December quarter, while labour productivity – measured by GDP per hour worked – was flat over the quarter. Productivity growth increased by 1.0 per cent in annual terms, which was only slightly below its 20-year pre-pandemic average of 1.2 per cent. Annual growth in market sector productivity rose by 1.5 per cent, while productivity growth in the non-market sector fell by 0.7 per cent.¹

Labour market conditions remain tight, with the economy-wide wages bill or compensation of employees (COE) rising by 1.4 per cent in the December quarter and 6.4 per cent over the year. This measure contrasts with the more modest Wage Price Index measure (3.4 per cent over the year to December), because it also reflects growth in the number of employees and hours worked.

Nominal unit labour costs – a broader measure of labour costs – increased by 0.5 per cent in the quarter. In annual terms nominal unit labour costs moderated to 3.3 per cent, from 4.8 per cent in the September quarter, but remain elevated. Continued improvements in labour productivity are needed to further moderate growth in unit labour costs and reduce inflationary pressures.

Company profits rose by 2.2 per cent in the December quarter, the highest since the March quarter 2023. The mining sector was the main driver, rising 5.7 per cent due to an increase in production while there was also higher prices for iron ore and gold. In annual terms company profits increased by 4.4 per cent.

Persistent price pressures across the economy remain a concern

In line with the Consumer Price Index data, National Accounts measures of prices accelerated across the economy in the December quarter, reinforcing the need for rate rises by the Reserve Bank. Inflation pressures continue to be largely homegrown, but international prices also strengthened. Domestic prices rose by 0.9 per cent in the quarter, to be 3.1 per cent higher over the year, driven by higher construction costs due to capacity constraints and higher broad-based consumption prices. International prices strengthened by 1.4 per cent in the December quarter and ticked up to 2.7 per cent in annual terms. International prices are likely to continue rising into the March quarter of 2026, given tensions in the Middle East and the rise in oil prices.

The terms of trade – the ratio of export to import prices – rose by 0.4 per cent in the December quarter. Export prices rose by 1.8 per cent due to stronger demand for Australian rural goods, outpacing the 1.4 per cent increase in import prices as international airfares increased.

Private investment remains strong helping to drive growth

For a fifth consecutive quarter, private investment improved, rising by 0.7 per cent in the December quarter, contributing 0.1 percentage points to GDP growth. Both business investment and dwelling investment grew. Private investment rose by 5 per cent in annual terms, compared to 4.9 per cent in the September quarter, the highest growth rate since the December quarter 2021.  

Business investment rose by 0.2 per cent in the December quarter, to be 3.9 per cent higher over the year, moderating slightly from the September quarter. Investment in data centres in Victoria and NSW which is captured in non-dwelling construction and machinery and equipment, were the main drivers of annual growth. The recovery in business investment is positive, but as a share of nominal GDP it remains sluggish on a historical basis at 12.3 per cent, compared to the 20-year pre-pandemic average of 14.6 per cent.

Capital expenditure plans, which are a leading indicator of business investment, were revised up to nearly $200 billion for 2025-26. The first estimate for capex plans in 2026-27 was stronger than previous estimates, up 7.3 per cent compared to the same reading a year ago. The non-mining sectors continue to be the main driver for the lift in capex plans, rising by 10.8 per cent compared to the year before, while mining capex plans fell. Noting that this measure includes the impact of rising costs, the pick up in investment could be maintained through 2026. 

Public demand remains elevated and this is unlikely to change

Public demand rose strongly in the December quarter and contributed 0.3 percentage points to GDP, driven by both government consumption and investment. As a share of nominal GDP, public demand remains elevated at nearly 29 per cent and well above the pre-pandemic 10-year average of 24.4 per cent. This is likely to continue given the pipeline of public infrastructure, defence plans and continued strong demand for government services.

Government consumption increased by 0.9 per cent, compared to a rise of 1.1 per cent in the September quarter, and contributed 0.2 percentage points to growth. As a percentage of nominal GDP, government consumption remained elevated at 23.3 per cent, its highest level since the peak of the pandemic in 2020. Higher spending by state and territory governments on electricity rebates and wages for frontline services was the main driver, as was Federal Government spending on defence. Over the year, public consumption rose by 3.3 per cent.

Public investment contributed 0.1 percentage points to GDP growth, thanks to a 0.9 per cent rise in the December quarter. State and local general government spending continued to rise, focused on transport and health projects, while national government spending on defence assets saw the strongest rise at over 7 per cent. Commonwealth public corporations spending was also strong, rising by over 6 per cent in the quarter. Public investment fell by 0.9 per cent in annual terms, but remained elevated, accounting for 5.6 per cent of nominal GDP.

Build-up of inventories contributed to growth, while net trade fell slightly

Net trade detracted 0.1 percentage points from growth in the December quarter, reflecting a 1.8 per cent rise in imports, which outpaced a 1.4 per cent rise in exports.

Goods imports rose by a solid 2.7 per cent, driven by higher imports of small scale batteries as households took advantage of the ‘Cheaper Home Batteries’ program. Increased demand for gold also contributed to higher goods imports in the quarter. Service imports fell by 0.4 per cent as less Australians travelled overseas compared to the September quarter in response to higher international airfares.

Goods exports increased by 1.4 per cent in the December quarter, driven by higher iron ore demand from China. Service exports rose by 1.1 per cent, reflecting an increase in short-term tourists attending major music and sporting events in Australia.

Changes in inventories contributed 0.4 percentage points to growth, driven by a rise in mining production and top up of coal inventories. Higher gold imports by the public sector also contributed to the rise in inventories.