Australian National Accounts, March 2026: Economy losing momentum before the Middle East conflict

In brief:

• Gross Domestic Product (GDP) increased by 0.3 per cent in the March quarter and 2.5 per cent over the year.
• Private demand contributed to growth, driven largely by investment in data centres, while public demand made no contribution and net trade detracted from growth.
• The economy was already losing momentum at the start of 2026, before the full effects of the conflict in the Middle East and recent Reserve Bank rate hikes were felt.

From EY Australia Senior Economist Paula Gadsby

The March quarter National Accounts show the Australian economy was already losing momentum at the start of 2026, before the full effects of the conflict in the Middle East and recent rate hikes by the Reserve Bank were felt. Quarterly GDP growth of 0.3 per cent was weaker than market expectations and down from 0.9 per cent in the December 2025 quarter

Data centres helped power growth in the Australian economy for the third consecutive quarter, pushing investment in machinery and equipment up 16.3 per cent, faster than the mining investment boom peak in 2012. However, because most data centre equipment was imported, these gains were offset, with net exports detracting 0.8 percentage points from GDP growth. Weaker shipments of iron ore and coal due to cyclone disruptions, along with falling education services exports, also weighed on the result.

Other areas of private demand point to softer conditions. Business investment outside of data centres appears weak and households faced higher costs for essentials such as electricity as government rebates came to an end. Weaker discretionary spending and falling imports of consumption goods suggest a weaker outlook for household consumption, in line with very low consumer sentiment.

The government sector made no contribution to GDP growth as the rise in spending on defence assets and state government transport and health projects was offset by the ending of state government energy bill relief.

The annual growth rate of 2.5 per cent was steady compared to last quarter and in line with Australia’s long-run average growth rate. Inflationary pressures are likely to persist, with productivity growth continuing to lag and unit labour costs remaining elevated.

Today’s result is unlikely to impact the Reserve Bank’s deliberations at its June meeting, and we expect further monetary tightening in the second half of this year.

While the full effects of the Middle East conflict, higher interest rates and inflation are yet to be seen, the outlook for the Australian economy in 2026 appears increasingly challenging. Cautious consumers, softer business sentiment and a potential cooling in the housing market could compound these impacts and weigh further on growth.

Household spending continued to grow despite cost-of-living pressures

Household consumption rose by 0.5 per cent in the March quarter, making a 0.3 percentage point contribution to growth. Households continued to allocate their spending towards essential goods and services. Essential spending rose by 0.8 per cent in the March quarter as consumers spent more on electricity due partly to the end of government energy rebates. Spending on discretionary items rose by just 0.1 per cent in the quarter, reflecting ongoing cost-of-living pressures and uncertainty over the Middle East conflict.

Income tax payable less social assistance benefits as a share of disposable income remained elevated at 12.0 per cent in the March quarter, which continues to weigh on household consumption. The household saving ratio fell to 6.2 per cent, down from 7.0 per cent in the December quarter, and is in line with its 10-year pre-pandemic average.

In annual terms, household consumption increased by 2.5 per cent, unchanged from the December quarter. Household spending growth is expected to weaken in 2026 as higher inflation and interest rates weigh on demand, as indicated by the recent fall in consumer sentiment. Elevated economic uncertainty presents further downside risks, with the possibility of further tightening in monetary policy by the Reserve Bank.

Dwelling investment continued to rise driven by alterations and additions

Dwelling investment rose by 0.7 per cent in the March quarter but made no contribution to growth. Over the year, dwelling investment growth moderated sharply to 3.5 per cent, from 5.1 per cent in the December quarter.

Alterations and additions rose by 3.2 per cent in the quarter and were 3.5 per cent higher over the year. New house building fell by 0.8 per cent in the quarter, due to a fall in private detached dwellings, and was 3.5 per cent higher over the year, down sharply from relatively strong growth numbers over the last five quarters. Ownership transfer costs fell by 4.1 per cent in the quarter, with the annual growth rate moderating from 11.0 per cent in the December quarter to 6.1 per cent in line with weaker activity in the property market. This comes ahead of the recent decline in housing sentiment following the Federal Budget.

Dwelling investment as a share of nominal GDP remained at 5.4 per cent, broadly in line with the 20-year pre-pandemic average. Construction price pressures increased over the March quarter and higher construction costs and interest rates are likely to constrain future growth in dwelling investment. Dwelling approvals fell by 3.4 per cent in April, following a 10.5 per cent decline in March.

Productivity growth remained weak, while labour costs remained elevated

Hours worked rose by 0.9 per cent in the March quarter, while labour productivity – measured by GDP per hour worked – fell by 0.6 per cent over the quarter. Productivity growth increased by 0.3 per cent in annual terms, which was well below its 20-year pre-pandemic average of 1.2 per cent.

Labour market conditions remained tight, with the economy-wide wages bill or compensation of employees (COE) rising by 1.2 per cent in the March quarter and 5.9 per cent over the year. This measure contrasts with the more modest Wage Price Index measure (3.3 per cent over the year to March), 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 0.8 per cent in the quarter. In annual terms nominal unit labour costs were steady at 3.2 per cent in the March quarter and remain elevated. Continued improvements in labour productivity are needed to further moderate growth in unit labour costs and reduce inflationary pressures.

Company profits fell by 0.4 per cent in the March quarter reflecting lower commodity prices and weaker mining production, particularly for iron ore and coal. In annual terms, company profits increased by 3.9 per cent.

Terms of trade increased as import prices fell

Australia’s terms of trade – the ratio of export to import prices – rose by 1.1 per cent in the March quarter. Import prices fell by 1.2 per cent due to the appreciation of the Australian dollar, while export prices fell by 0.1 per cent, reflecting lower iron ore prices.

The National Accounts measure of price pressures on the domestic economy increased by 0.4 per cent in the March quarter. The increase in prices was driven by higher fuel prices due to the conflict in the Middle East, as well as higher construction costs. In annual terms, domestic prices moderated to 2.9 per cent, from 3.1 per cent in the December quarter.

International prices fell by 1.3 per cent in the March quarter as the Australian dollar appreciated, reducing the price of imports. In annual terms, international prices fell by 0.8 per cent, the first fall since December 2024. As the Middle East conflict continues, international price pressures may increase.

Business investment in machinery and equipment surged due to data centres

Private investment continued its improvement for a sixth consecutive quarter, contributing 0.7 percentage points to GDP growth. Private investment rose by 3.6 per cent in the March quarter, compared to 0.7 per cent in the previous quarter, driven by business investment. In annual terms, private investment reached its highest level since the December quarter of 2021, at 8.1 per cent.

Business investment rose by 6.0 per cent in the March quarter, to be 10.5 per cent higher over the year. Ongoing investment in data centres in New South Wales and Victoria was the main driver, pushing investment in machinery and equipment to its highest levels in 30 years at 16.3 per cent. Business investment as a share of nominal GDP rose to 12.9 per cent, but despite the recovery, it remains below the long run average of just under 15 per cent.

Capital expenditure plans, which are a leading indicator of business investment, were revised up 4.5 per cent higher to $208 billion for 2025-26. The second estimate for capex plans in 2026-27 was stronger than previous estimates, up 11.1 per cent compared to the same reading in 2025-26. The non-mining sectors continue to be the main driver for the lift in capex plans, rising by 15.3 per cent compared to the year before, while mining capex plans edged up 2.2 per cent. This momentum could continue, supported by investment in data centres, but it is worth noting that this measure includes the impact of rising costs.

Public demand failed to contribute to growth

Public demand was flat in the March quarter, making no contribution to GDP growth, as higher public investment was offset by falling government consumption.

Government consumption made no contribution to growth, falling by 0.2 per cent in the March quarter, after rising by 0.9 per cent in December 2025. Over the year, growth in public consumption eased to 2.8 per cent. The end of state government energy bill relief was the main driver, while higher non-defence spending by the federal government in areas such as home and aged care offset the fall in defence spending.

Public investment rose by 0.9 per cent in the quarter, in line with the December quarter. This was mainly concentrated around national government spending on defence weapons platforms, up nearly 7 per cent in the quarter, and state and local general governments on transport and health projects. After three consecutive quarters of weak annual growth, public investment was 1.1 per cent higher. Public investment added 0.1 percentage points to GDP growth in the March quarter.

Public demand as a share of nominal GDP continues to hover around 29 per cent – made up of 23.2 per cent from government consumption and 5.6 per cent from public investment. This remains well above the pre-pandemic averages. Given strong demand for government services and public infrastructure in the pipeline, this is expected to continue.

Net trade detracted from growth

Net trade detracted 0.8 percentage points from growth in the March quarter, reflecting a 2.1 per cent rise in imports, while exports fell 1.1 per cent.

Goods imports rose by 1.4 per cent, driven by record imports of new data centre equipment. This was partly offset by lower consumption goods imports due to lower demand for motor vehicles. Service imports increased by 3.8 per cent, with strength across all categories supported by the appreciation of the Australian dollar.

Goods exports fell by 0.8 per cent in the March quarter, as coal and iron ore fell given cyclone disruptions to port operations. Service exports fell by 2.1 per cent, reflecting lower international student numbers and reduced average spending by this cohort.

Changes in inventories made no contribution to growth, as a rise in mining inventories was mostly offset by a fall in manufacturing and retail trade inventories.