Aussie economy grows, AMP expects inflation to slow

Australian gross domestic product rose 0.8 per cent quarter-on-quarter and 2.6 per cent year-on-year for the December quarter 2025, the ABS has reported.

“There was broad-based economic growth in the quarter, with rises observed in a large majority of industries. Public and private demand each contributed 0.3 percentage points to GDP growth,” said Grace Kim, head of national accounts at the ABS.

This was due to the 0.8 per cent quarter-on-quarter growth in public and private demand this quarter, as well as inventories being replenished after last quarter’s drawdown, AMP said.

AMP said that this 0.8 per cent increase over the quarter was very close to consensus forecasts. It noted that upward revision for the prior quarter led to annual growth of 2.6 per cent (the best result in nearly three years), which was also above RBA estimates for potential growth of around 2.2 per cent per annum.

Betashares chief economist David Bassanese suggested that these results are a mirror image of the September quarter result.

“The GDP data is lagged, but it is the most comprehensive look into the economy, and today’s figures confirmed that the economy has been rebounding strongly throughout the second half of 2025, and demand was potentially hotter than the supply capacity,” AMP said.

“The economic recovery in the second half of 2025 has been rather broad-based, with household consumption, government spending, residential construction, and private business investment all contributing to the strong growth,” it added.

Over four consecutive quarters, GDP per capita has risen by 0.4 per cent quarter-on-quarter or 0.9 per cent year on year — the highest through the year growth from December quarter 2022, following a fall between mid-2023 to end-2024.

Pay, spending and savings

Compensation of employees rose 1.4 per cent across public and private sectors — 6.5 per cent higher than a year ago — with strong growth in healthcare and social assistance, construction, and professional and technical services. The data revealed that the rise was combined with an increase in non-life insurance claims as well as higher incomes from unincorporated enterprises, which drove the overall rise in household gross disposable income.

In addition, household disposable income was found to have risen 1.8 per cent, which was significantly higher than the nominal increase in household spending, which was at 1.1 per cent.

Further, the data revealed that discretionary spending has increased 0.4 per cent, with extended Black Friday sales and high attendance at sporting and concert events playing a role.

AMP added that the increase in discretionary spending was driven by increased tourism, major events, and extended promotional periods — with hotels and dining up 1.4 per cent, recreation, and culture up 0.8 per cent, furniture up 2.1 per cent, and clothing up 1.3 per cent.

Despite an increase in discretionary spending, the household saving to income ratio was found to have risen to 6.9 per cent, higher than it was in the September quarter at 6.1 per cent and at its highest level since the September quarter 2022.

AMP said that this rise in savings will act as support for future spending, with the rise likely to be skewed to older demographics, and suggests a degree of caution from consumers.

In addition, ABS’s results revealed that essential goods and services spending rose 0.2 per cent in the quarter, with essential services having grown 0.4 per cent, offset by lower spending on essential goods (down 0.5 per cent).

“Additionally, higher inflation this year will act as a tax on spending (through reducing real wage growth), and the recent rate hike will add to the mortgage burden, which potentially will slow the momentum in household consumption in 2026,” AMP said.

Utilities expenditure (electricity, gas, and other fuels), which dropped by 9.5 per cent, drove smaller growth in essential spending, the ABS found. This fall was driven by reduced electricity usage, which detracted 3.3 percentage points in conjunction with reduced out-of-pocket spend through government rebates, which detracted 6.2 percentage points, with electricity rebates being recorded as government expenditure.

“This distortion is due to the increase in electricity rebates, so electricity spending is categorised as a government expenditure rather than households (though this will revert in 2026 as the rebates end),” AMP said.

“Household spending growth pace has stepped down to 0.3 per cent quarter-on-quarter (from 1 per cent quarter-on-quarter in June and 0.5 per cent quarter-on-quarter in the September quarter). In annual terms, household spending is up by 2.4 per cent. This is much lower than the RBA’s forecast for 0.9 per cent quarter-on-quarter and 3.1 per cent year-on-year growth.”

“Household consumption was a surprise miss in today’s suite of data, though it was dragged down by electricity rebates and 'legal’ tobacco consumption and the details were much more positive. Keep in mind that households account for half of the total GDP, so it is arguably one of the most important reads.”

Private and public investment

For the fifth consecutive quarter, private investment increased, up by 0.7 per cent and contributing 0.1 percentage points to GRP growth. AMP said that a slowing in private investment growth, with a 3.2 per cent increase in the following quarter, with investment across most asset classes being maintained at high levels.

In addition, machinery and equipment (M&E) fell by two per cent following a 7.8 per cent increase in the September quarter. AMP noted that this was due to last quarter’s rapid investment into data centres; however, it noted that they remained at high levels versus historical growth.

“Investment in data centres and aircraft was maintained at high levels. Investment in M&E was 4.0 per cent higher through the year,” said Kim.

“Overall, private business investment remains a bit more lacklustre than other parts of the economy (light blue bar in the chart below), consumer spending growth is tapering gradually (purple bar), and public demand remains a large contributor to economic growth (green bar),” it added.

Private business investments were found to rise by a smaller 0.2 per cent, following its 3.5 per cent jump in the September quarter.

At an increase of 0.9 per cent, public investment grew, continuing its growth following a three per cent rise in the September quarter.

“Overall, after slowing in late 2024-early 2025, the public sector is growing quickly again, accounting for around 28 per cent of the whole economy which is near a record high,” AMP found.

Further, the data revealed that housing investment contributed 0.1 percentage points to GFP growth with a rise in the construction of apartments and high real estate turnover. Driven by an increase of 1.1 per cent quarter-on-quarter for new housing, residential construction rose 0.6 per cent quarter-on-quarter, which AMP said reflected the increase in building approvals over the first half of the year. However, AMP noted that new approvals have stalled lately, predicting a decrease in upcoming quarters.

In addition, investment from state and local governments grew 1.4 per cent, led by transport infrastructure and commonwealth government investment grew 3.3 per cent, led by greater investment in a range of defence assets.

Expenditure by governments at the state and local levels rose one per cent, which included increased spending on electricity rebates as well as employee expenses across health, education, and police, with commonwealth expenditure rising 0.8 per cent in the December quarter.

Productivity, exports, and inflation

“Australia’s productivity growth (as measured by GDP per hour worked) was flat in the December quarter and was up by 1% over the year. Despite the flattening over the quarter, the pickup in year-on-year growth is positive and much needed to increase the supply capacity of the economy. Non-farm productivity growth is lower (up by 0.4% over the year) because of strength in agricultural productivity,” AMP found.

“Productivity growth is the long-term driver of living standards (measured by looking at disposable income after inflation impacts are taken into account),” it added.

AMP noted that actual December quarter growth was in line with the RBA’s forecast in February. Despite this, actual household consumption (2.4 per cent year-on-year) was below the RBA’s forecast of 3.1 per cent.

It said that although the data does not implore the RBA to hike the cash rate again at the next meeting, it explains why inflation had increased in the second half of the year.

“Public sector spending should slow from here and not add as much to GDP growth, but consumer spending is still holding up, business investment is okay and export growth is positive. So, GDP growth is likely to remain elevated,” it said.

“The key is to watch the monthly inflation data from here. The January figures did not show enough of an increase to warrant a back-to-back rate rise, but another interest rate increase is possible in May or again later this year. Our view on inflation is that it will slow from here, but if it continues to surprise again, the RBA will not hesitate to increase the cash rate,” it added.

“Adding to the case for caution, at least in the near term, is the surge in geopolitical risks associated with the conflict in the Middle East. While the conflict poses an upside risk to inflation through higher oil prices, it also creates an offsetting downside risk to non-energy inflation if extended hostilities undermine business and consumer confidence both at home and abroad,” Bassanese said.

ABS data revealed increased levels of production in 17 out of 19 industries, with mining and agriculture production increasing by 2.6 per cent and 2.5 per cent, respectively. Mining production contributed 0.3 percentage points to GDP growth as mines resumed work following scheduled maintenance in the previous quarter.

The bureau said that the rise in agricultural production reflects a rise in conditions and international demand for Australian meat.

In mining, increased activity matched higher export prices for mineral ores, driving a rise in mining profits having increased 5.7 per cent in the quarter. The bureau found that profits for all corporations increased 2.2 per cent in the December quarter, which was the highest quarterly increase since the March quarter 2023.

AMP noted that export growth was resilient in the December quarter, with a 1.4 per cent growth driven by mineral ores, rural products, as well as transportation and travel services, beef, and citrus.

Further, it found that net trade reduced GDP growth as imports rose 1.8 per cent, which was driven by a 22.5 per cent rise in telecom equipment, a byproduct of the expansion in data centres.

AMP suggested that the 40.5 per cent quarter-on-quarter rise in non-monetary gold imports may suggest that Aussies started investing in gold en masse late last year.

“At this stage, the case for an RBA rate hike still appears to rest critically on the Q1 CPI report in late April. A strong result, with quarterly trimmed mean inflation of 0.8 per cent or more, would likely result in a May rate hike. Evidence of further strong domestic demand in today’s Q4 data could have provided grounds for a rate hike this month, though as noted above, that evidence appears lacking,” Bassanese concluded.