Australian National Accounts September 2025: GDP report has bright spots, but inflation clouds loom

In brief:

• Gross Domestic Product (GDP) increased by 0.4 per cent in the September quarter and 2.1 per cent over the year.
• Growth was below expectations and inflation risks loom, but the solid increase in private investment and reasonable rise in household consumption were positive.
• Public demand continued to grow as a share of the economy, which could put further pressure on a capacity constrained economy.

From the Chief Economist

The national accounts update of the economy showed 2.1 per cent growth in the year to the September quarter, with a 0.4 per cent rise in GDP in the quarter. On a per capita basis, growth was flat, suggesting economic growth is only reflective of population growth. This was below expectations and comes with unwelcome inflation, as flagged in recent consumer price index reports.

But there was better news in the detail.

The run down in inventories to support commodity exports, retail discounting and even gold demand, together with higher capital goods imports all dragged GDP down mechanically. But these factors are consistent with an economic recovery. Strong imports were helped by the appreciation of the Australian dollar, which makes offshore purchases cheaper for Australian businesses and households. Concern that Trump’s tariffs would derail our trade sector faded – although we are not at the end of that story. China’s stimulatory measures provided an offset by keeping demand for Australian iron ore high and its price healthy.

There was a solid increase in private investment spending related to computer equipment and data center expansion in New South Wales and Victoria, and house building was up.

The public sector was also a contributor to growth due to renewable energy and water infrastructure. Defence investment contributed to growth, as well as state government investment in transport infrastructure. The public sector continues to grow as a share of the economy, which although provides a welcome boost to activity, could put further pressure on a capacity constrained economy as private sector investment lifts.

Household consumption rose reasonably too, although more softly than in the June quarter. The expiry of some electricity rebates increased the amount some consumers had to pay for utilities. Lower interest rates and improved growth in household disposable income also likely helped though. The bump-up in employees’ superannuation guarantees from 11.5 to 12 per cent in the quarter, together with strong rises in equity and house prices may have contributed to the rise in consumption, via a wealth effect too.

The rise in iron ore prices and lower import prices boosted the terms of trade and so higher national income will also boost government revenues. The federal government recently noted that in the year to October, its tax collections were running ahead of forecasts.

The GDP result is reasonable. The worst part of the September quarter’s economic news was the already known pick-up in inflation. The Reserve Bank will look at the national accounts reasonably positively, but with limited interest. These GDP results are mostly aligned with the Reserve Bank’s own forecasts, but the inflation numbers were not. Reversing the resurgence in inflation is the main game right now.

The Reserve Bank will be on hold as it looks for evidence of whether uncomfortably high inflation is temporary, or the economy is pushing up against structurally problematic capacity constraints. On account of the higher-than-sustainable unit labour costs and the continued poor productivity numbers, we suspect the latter. In that environment, rate cuts are unlikely, and hikes may even be on the agenda in 2026. 

Household consumption increased due to spending on essentials  

The recovery in household spending slowed in the September quarter. Household consumption rose by 0.5 per cent in the September quarter, down from 0.9 per cent in the June quarter, contributing 0.3 percentage points to GDP growth. The result was driven by strength in essential spending, which rose by 1.0 per cent, due to increases in payments for financial services, electricity, and health. This was partially offset by a slight fall of 0.2 per cent in discretionary spending, following the strong 1.5 per cent rise in the June quarter given the extended Easter holiday period and high demand for end of financial year sales.

In annual terms, household consumption grew by 2.5 per cent, which was the highest growth rate since June 2023, but still slightly lower than the 10-year pre-pandemic average of 2.6 per cent. The rise reflected strength in both discretionary spending, which rose by 2.3 per cent, and essential spending, which rose by 2.6 per cent. The recovery in consumer spending reflects higher disposable income, driven by lower interest rates as well as lower inflation compared to a year ago. Meanwhile, tax payable less social assistance benefits as a share of disposable income increased by 0.4 percentage points in the September quarter and remains elevated. This continues to weigh on household consumption.

The household saving ratio rose to 6.4 per cent in the September quarter, up from 6.0 per cent in the June quarter, and above its 10-year pre-pandemic average of 6.2 per cent.

Household consumption has recovered as cost of living pressures have eased. However, with future rate cuts unlikely, elevated interest on dwellings and the high debt burden may constrain future household consumption growth. In addition, the recent pick-up in inflation may constrain household budgets if sustained. While it has recently increased, consumer sentiment remains well below the 10-year pre-pandemic average. The labour market remains relatively tight, but there has been a gradual easing in conditions, which if continued, could deter further consumption growth.

Lower interest rates driving higher dwelling investment and real estate turnover

Dwelling investment contributed 0.1 percentage points to growth, rising by 1.8 per cent in the September quarter due to rising dwelling construction. This follows a weak 0.4 per cent rise in the previous quarter. Dwelling investment rose by 6.5 per cent over the year to September, up from 5.6 per cent in the June quarter. Dwelling investment as a share of nominal GDP is close to its 20-year pre-pandemic average of 5.4 per cent.

New house building rose by 2.6 per cent in the quarter, which is the strongest rise since the June quarter 2023. Over the year, new house building was 5.9 per cent higher. Alterations and additions continued to ease in the September quarter, rising by 0.5 per cent, from 1 per cent in the June quarter. Ownership transfer costs rose by a strong 5.0 per cent as activity in the property market increased, with significant interest from property investors.

Further improvements in dwelling investment may be limited given the cost of building a new dwelling has started to rise again, dwelling approvals look to have stabilised and interest rates are unlikely to be lowered further given the uptick in inflation. Without a strong rise in supply, housing affordability will remain an issue.

Productivity growth improved while unit labour costs remain elevated

Hours worked rose by 0.2 per cent in the September quarter, while labour productivity – measured by GDP per hour worked – also rose by 0.2 per cent over the quarter. In annual terms, productivity growth increased by 0.8 per cent, the fastest rate of growth since June 2024. However, productivity growth remains below the pre-pandemic average growth rate of 1.2 per cent. Annual growth in market sector productivity rose by 1.0 per cent, while productivity growth in the non-market¹ sector fell by 0.3 per cent.   

Compensation of employees (COE) – a measure of the economy-wide wages bill – rose by 1.7 per cent during the quarter. The public sector grew by 2.2 per cent due to pay rises for workers in health, education and police, while the private sector increased by 1.6 per cent. In annual terms, COE rose by 7.1 per cent in the September quarter, which was higher than 6.7 per cent in the previous quarter and remains elevated because of relativity tight labour market conditions.

Nominal unit labour costs – a broader measure of labour costs – increased by 1.3 per cent in the quarter. In annual terms nominal unit labour costs remain elevated rising by 4.9 per cent, from 4.2 per cent in the previous quarter. The Reserve Bank is hoping for continued improvements in labour productivity to help offset high unit labour costs and reduce inflationary pressures.

Company profits for the non-financial sector increased by 1.0 per cent in the September quarter. This was mainly driven by the mining sector due to higher prices and export volumes of iron ore and thermal coal. In annual terms company profits rose by 0.9 per cent.

Domestic price pressures build while the terms of trade rise for the first time this year

Price pressures in the domestic economy accelerated by 0.8 per cent in the September quarter given rises in electricity and gas, food and travel. Labour costs also continued to rise given the tight labour market. Like the September quarter Consumer Price Index read, this is concerning given the broad-based nature of inflationary pressures in the economy. In annual terms, domestic prices rose 3.1 per cent. International prices fell by 0.4 per cent in the September quarter and continued to moderate in annual terms to 2.4 per cent.

The ratio of export to import prices or terms of trade rose by 0.3 per cent in the September quarter. This reflects a 0.1 per cent fall in export prices driven by weaker demand for LNG, offset by a larger 0.4 per cent fall in import prices, as a stronger Australian dollar impacted consumption and capital goods. 

Private investment strength a bright spot

Private investment experienced a solid 2.9 per cent increase in the September quarter, thanks to investment in machinery and equipment and dwellings. This is the highest quarterly growth rate since March quarter 2021 and contributed 0.5 percentage points to GDP growth. In annual terms, private investment accelerated to 4.7 per cent, compared with 1.3 per cent in the previous quarter.

Business investment as a share of nominal GDP ticked up a little to 12.4 per cent but remains sluggish on a historical basis, and close to the lows during the pandemic and the 1990s. In a positive sign, business investment has risen by 3.2 per cent in the September quarter, following two consecutive quarters of declines. The main driver was a 7.6 per cent increase in machinery and equipment for the ongoing expansion in data centres. Over the year business investment rose by 3.7 per cent, the strongest growth since the end of 2023.

Non-mining investment was the main driver of the rise in investment, up 4.4 per cent in the September quarter, while mining investment fell by 0.5 per cent.

Businesses revised their capital expenditure plans for 2025-26 increasing them to over $190 billion. This is a leading indicator of business investment and suggests that the pick up in investment could be maintained. This is 9.4 per cent higher than the previous estimate for 2025-26, and 7.6 per cent higher than the same reading a year ago. Non-mining capex plans, which rose 10 per cent, were the main driver of the lift in capex plans, while mining capex expectations rose by 0.5 per cent compared to the same reading in 2024-25. Although this measure is in nominal terms and includes the impact of rising costs, the rise in non-mining capex plans is positive and indicates a lift in real activity.

Public sector continued to rise as a share of the economy  

Public demand rose strongly in the September quarter and contributed 0.3 percentage points to GDP. The rise was driven by strength in both government consumption and investment.

Government consumption - which mostly reflects recurrent spending – increased by 0.8 per cent in the September quarter, following a 0.9 per cent rise in the previous quarter, and contributed 0.2 percentage points to GDP growth. The rise was driven by higher spending by state and territory governments, which rose by 1.0 per cent due to increased spending on health and education. Federal spending also rose by 0.5 per cent, driven by a rise in payments for Medicare and the Pharmaceutical Benefits Scheme. In annual terms, growth in public consumption moderated to 2.6 per cent in the September quarter, from 3.5 per cent in the June quarter. As a percentage of nominal GDP, government consumption remained elevated at 23.3 per cent in the September quarter.

Public investment rose by a solid 3.0 per cent in the September quarter, contributing 0.2 percentage points to GDP growth. The strong result reflected higher spending from both national and state and territory governments, driven by increased investment in defence, as well as renewable energy and water infrastructure projects. In annual terms, public investment fell by 3.1 per cent over the year to the September quarter but remains elevated as a percentage of nominal GDP compared to the 10-year pre-pandemic average.

Overall, public demand was higher in the September quarter at 28.9 per cent of nominal GDP and is well above the 10-year pre-pandemic average of 24.4 per cent. Public demand is expected to remain elevated, given the strong public infrastructure pipeline and continued expansion of government services in response to high demand.

Rundown in inventories detracted from growth while net trade also fell slightly

Net trade detracted 0.1 percentage points to growth in the September quarter, reflecting a 1.5 per cent rise in imports, which was partially offset by a 1.0 per cent rise in exports.

Goods imports rose by a solid 2.1 per cent due to higher imports of capital goods reflecting increased investment in computer equipment linked to data centre expansions. Imports of intermediate goods also rose due to higher diesel imports from Asia.  Service imports fell by 0.2 per cent in the quarter as less Australians travelled on non-resident airlines.

Goods exports increased by 1.3 per cent in the September quarter, driven by a recovery in coal exports following weather disruptions in the previous quarter. Service exports were unchanged in the September quarter, as an increase in short-term tourists from Asia was offset by reduced spending from international students.

Meanwhile, a $1.9 billion rundown in inventories detracted 0.5 percentage points from growth. This was driven by a fall in mining inventories as export demand for coal increased. Retail trade inventories were also drawn down given the extended discount period into the September quarter. Higher demand for gold from public authorities also contributed to the draw down in inventories, following the build-up in June.