Australian National Accounts March 2025: An economy in need of a kickstart

In brief:

• Gross Domestic Product (GDP) increased by a softer than expected 0.2 per cent in the March quarter and 1.3 per cent over the year.
• Growth in the Australian economy was weak as household consumption and investment were up only modestly while government investment spending was lower. Also temporary weather events hurt tourism while coal and liquefied natural gas exports were down too as a result. International student arrivals were lower than usual.
• Most worrying is the malaise that has set in across the business sector and households.

From the Chief Economist

There was nothing to be happy about in the national accounts today. The economy has little energy and entered the second quarter sub-optimally as new threats from geopolitical troubles and higher tariffs brought new headwinds.

A 0.2 per cent growth rate in March quarter GDP, and a 0.2 per cent fall in GDP per capita showed that the economy is effectively flatlining. Over the previous four quarters, the Australian economy managed to eke out just 1.3 per cent GDP growth. Some of the weakness can be blamed on temporary weather events interrupting exports and hurting tourism and localised spending, but more worrying is the malaise that has set in across the business sector and amongst households. Productivity growth was flat in the quarter and down over the year, with no evidence that Australia is making progress in shifting the problem which worsened in the immediate aftermath of the pandemic.

Additionally, high demand for our commodities, which helped protect the economy through the pandemic, can’t be relied on to continue. Outside of the extraordinary rise in gold price, windfalls are not propping income growth up anymore. Exports of international education, until recently a source of growth, detracted from growth in the March quarter with lower numbers of students entering the country.

It is a warning sign that current policy settings are doing nothing to boost the economy’s capacity or ability to cope with new challenges.

Household consumption rose only 1.0 per cent in the quarter in nominal terms even though there was a well-flagged interest rate cut in February and higher income support from government, helping gross disposable income rise 2.4 per cent. Households chose to save a larger proportion of their extra income, taking the household saving rate up to a nearly three year high of 5.2 per cent. Australia’s social benefits increased by a very strong 6.0 per cent in the March quarter and 10.8 per cent through the year, demonstrating how much of a role government support has played in propping up households recently.

The economy needs more monetary easing, especially now the threat of inflation is easing and the Trump Administration’s initial policy impacts on the global economy has not even fully shown up in the economic data. Had the Reserve Bank been able to observe the softness of the economy and the fall in inflation in the March quarter, it is likely the interest rate cutting cycle would have started sooner than February.

Beyond highlighting a need for monetary assistance, the national accounts also show longer term structural issues in the economy. Weak business investment which rose by only 0.8 per cent over the year to the March quarter, has been stuck between 11 and 15 per cent of GDP over the last decade. This suggests tax and regulatory settings are holding back innovation and also probably foreigners’ interest in investing in Australia. The Productivity Commission’s current work on how to boost productivity growth through “creating a dynamic and resilient economy” (as well as through other pillars) needs to be adopted with enthusiasm by the Albanese Government.

Recovery in household consumption softer than expected as consumers remain cautious

The recovery in household consumption into 2025 has been softer than the Reserve Bank expected, as consumers remain price sensitive. Household consumption growth moderated to 0.4 per cent in the March quarter, following the strength in the December promotional period (+0.7 per cent). In annual terms, household consumption rose by 0.7 per cent, in line with the December quarter.

Households also continue to increase their savings as a proportion of disposable income which may reflect increasing economic uncertainty. The household saving ratio jumped to 5.2 per cent in the March quarter from 3.9 per cent in the December quarter, rising for a third consecutive quarter. The saving ratio is moving closer to its 10 year pre-pandemic average of over 6 per cent.

Spending continues to be focused on essentials like food and rent, and households also had to spend more on electricity due to warmer than usual weather and as government rebates declined. Spending on essentials rose by 0.4 per cent in the March quarter, ticking up on an annual basis to 1.1 per cent. Discretionary spending rose by 0.3 per cent in the quarter, moderating from a 0.7 per cent rise in the December quarter. But there was an increase in spending on vehicles and sporting and music events. Over the year, discretionary spending rose by just 0.3 per cent.

The recovery in household consumption is expected to continue in 2025, given unemployment remains low and the Reserve Bank is expected to further loosen monetary policy. However, elevated economic uncertainty could present downside risks and further delay the recovery in consumption to its pre-pandemic long run average growth rate of 2.6 per cent.

Bounce back in dwelling investment as building costs ease

Dwelling investment rose by 2.6 per cent in March as construction price pressures eased over the quarter. Over the year, dwelling investment increased by 5.6 per cent – the highest growth rate since the September quarter 2021.

There were mildly positive signs for housing supply, with new house building rising by 2.3 per cent in the quarter to be 6.3 per cent higher over the year, the highest rate of growth since the June quarter 2023. Alterations and additions also recorded solid growth, rising by 2.9 per cent in the quarter and 4.7 per cent over the year. Ownership transfer costs fell by 1.3 per cent in the quarter, with the annual growth rate further moderating to 2.4 per cent in line with weaker activity in the property market.

Over the three months to April 2025, dwelling approvals were 16.4 per cent higher than over the same period last year, which should also support dwelling investment over the year ahead.

Productivity remains persistently weak, while labour costs ticked up

Productivity growth has been consistently weak and this continued in the March quarter. Labour productivity – measured by GDP per hour worked – was flat over the quarter, to be 1.0 per cent lower over the year. This is the third consecutive quarter that productivity growth has remained in negative territory in annual terms.

Labour market conditions remain tight, with the economy-wide wages bill or compensation of employees (COE) rising by 1.5 per cent in the March quarter, led by the private sector. At 6.5 per cent in annual terms, this is higher than 6.0 per cent at the end of 2024, and also the highest growth rate since the March quarter 2024. This compares with the narrower Wage Price Index measure (which rose to 3.4 per cent over the year to March).

Nominal unit labour costs – a broader measure of labour costs – increased by 0.9 per cent in the quarter, and ticked up in annual terms from 4.7 per cent in December to 5.1 per cent (2.6 per cent in real terms). This strong growth reflects persistently weak productivity growth. A sustained improvement in productivity growth – at least to its pre-pandemic long run average of 1.2 per cent – is needed to help offset unit labour costs and eliminate upside risks to inflation.

Company profits rose 1.1 per cent in the quarter, but were flat on an annual basis. Non-mining industries such as Manufacturing, Construction and Information Media and Telecommunications drove the rise thanks to higher sales and lower costs. This was partly offset by the mining sector with profits declining due to lower coal and LNG prices, while iron ore prices held up.

Terms of trade recorded a slight increase as export prices rose

Australia’s terms of trade – the ratio of export to import prices – rose by 0.1 per cent in the quarter, following a 1.6 per cent rise in December 2024. This reflects a 2.7 per cent rise in export prices due to higher iron ore and gold prices, which was partially offset by a 2.6 per cent rise in import prices due to a weaker Australian dollar.

The National Accounts measure of price pressures on the domestic economy increased by 0.7 per cent in the March quarter. The increase in prices was driven by continued increases in labour costs, and price increases across health, education, rent and fuel also contributing. In annual terms domestic prices moderated to 3.2 per cent, continuing the downward trend since March 2023.

International prices jumped by 2.6 per cent in the March quarter as the Australian dollar depreciated, increasing the price of imports. In annual terms international prices surged by 3.8 per cent, the first rise since June 2023.

Both headline and underlying inflation in the March quarter CPI read were within the Reserve Bank’s 2-3 per cent target band for the first time since 2021. The Reserve Bank expects inflation will remain around the midpoint of the target band over the near term. Uncertainty has increased given global geopolitical developments and tariffs with the Reserve Bank seeing the main force of these as being deflationary due to the downward influence of tariffs on GDP growth.

Business investment weak ahead of upcoming trade threats

Private sector investment contributed 0.1 percentage points to growth, rising by 0.7 per cent in the March quarter. Over the year, private investment increased by 2.3 per cent.

Business investment rose by a modest 0.1 per cent in the March quarter. This reflected a 1.3 per cent rise in non-dwelling construction driven by mining, manufacturing and electricity projects, partially offset by a 1.7 per cent fall in machinery and equipment investment. Over the year, business investment rose by 0.8 per cent.

Investment in the non-mining sector fell by 0.5 per cent in the quarter and as a proportion of GDP has remained below its 20-year pre-pandemic average since 2010. Mining investment rose by 2.4 per cent in the quarter.

The second estimate of capital expenditure intentions for 2025-26, reported by the Australian Bureau of Statistics last week, was $155.9 billion, which is just 0.7 per cent above the same reading for 2024-25, and could indicate minimal growth for business investment moving forward. This is based on data reported over April to May, which may indicate that businesses investment intentions have weakened given the current uncertain business environment. However, this measure is in nominal terms, so it could be impacted by easing construction costs.

Weak public demand drags on growth but likely to bounce back

Public demand fell by 0.4 per cent in the March quarter, as government investment dropped and government consumption was flat. This detracted 0.1 percentage points from GDP growth in the quarter, the first detraction from growth since the end of 2023.

Government consumption was relatively unchanged in the quarter and failed to make a contribution to growth. Spending was weak across both national and state and territory governments given reduced electricity rebates, while national defence spending rose 1.3 per cent. In annual terms, growth in public consumption moderated from 5 per cent in the December quarter to 3.4 per cent.

Public investment fell by 2 per cent, detracting 0.1 percentage points from March quarter GDP, but was 5.1 per cent higher on the year. Public corporations at all levels of government, along with state and local governments, drove the fall in spending as projects across energy, telecommunications, rail and roads came to completion or were delayed.

As a percentage of GDP, public demand has eased for the first time since December 2023 to be around 27.9 per cent, but remains close to a record high. Indications from federal and some state budgets suggest spending plans remain elevated, so public demand will remain solid. Demand for government services such as aged and home care, disability, health and childcare services, as well as increased government cost of living assistance is high. This is evidenced by the 15.5 per cent rise in social benefits to a record high of over $167 billion in 2023-24 – which is higher than during the pandemic period.

Inventories contributed to growth but was offset by weaker exports given lower overseas students and weather impacts

Net trade detracted 0.1 percentage points from growth in the March quarter, reflecting a 0.8 per cent fall in exports, which was partially offset by a 0.4 per cent fall in imports.

Service exports fell by 3.0 per cent in the March quarter, after a large rise in December. This reflected weaker growth in the number of overseas students in Australia with the average student also spending less. Goods exports decreased by 0.3 per cent, due to a decrease in coal and liquefied natural gas (LNG) exports as unfavourable weather conditions led to lower production and port output. This was partially offset by a dramatic increase in non-monetary gold exports to the United States in the March quarter.

Services imports fell by 0.8 per cent in the March quarter, with falls in both transport and travel as more Australians chose cheaper holidays. Goods imports fell by 0.3 per cent, driven by a decrease in capital goods.

Inventories contributed 0.1 percentage points to growth, mainly driven by a rise in mining inventories as lower export demand and unfavourable weather conditions reduced port output.