Economists warn of capacity constraints following lukewarm GDP figures

The Australian economy grew 0.4 per cent in the September 2025 quarter and 2.1 per cent compared to a year ago, GDP figures released by the Australian Bureau of Statistics (ABS) revealed on Wednesday (3 December).

Quarterly GDP growth fell short of major banks’ estimates, with Commonwealth Bank and Westpac respectively predicting quarterly growth of 0.7 and 0.8 per cent. However, upward revisions to prior quarters left annual GDP growth at 2.1 per cent, just shy of the expected 2.2 per cent.

September growth was led by private investment, which saw its highest quarterly growth rate since March 2021 (2.9 per cent) and contributed 0.5 percentage points to GDP growth. Major data centre investment across NSW and Victoria had supported this figure, the ABS said.

Public investment growth was also robust at 3.0 per cent, driven by spending on infrastructure projects. AMP economists My Bui and Diana Mousina expected public sector growth to decline over the medium term.

“Growth has broadened out to both public and private sectors with strong contribution from private business investments after three years of lacklustre growth, while inventories were drawn down to service increased export demand or replenish retail stock for extended discounts, which is not a bad sign,” Mousina and Bui noted.

Alex Joiner, chief economist at IFM Investors, said that the economy appeared to be approaching its potential growth rate, raising concerns about capacity constraints. This would leave further interest rate cuts off the table and raise the possibility of a hike.

“If we've got a situation where growth is near potential, that's not good in terms of bringing inflation down. And that's the problem. Usually strong growth is a good thing, but when you've already got inflation outside the target band and accelerating, it's not so good,” Joiner noted.

“It's really a situation where the Reserve Bank is absolutely on hold for the foreseeable future ... this sort of adds to the case that the Reserve Bank might need to reverse course and lift interest rates at some point.”

Pradeep Philip, head of Deloitte Access Economics, said that the September quarter GDP result showed that Australia needed to lift its capacity to support greater GDP growth.

“Growing uncertainty in the global economy, rising domestic inflation, and an economy treading water now pose a real conundrum for the Reserve Bank of Australia,” he said.

“The only way out of this conundrum is a concerted effort to lift the supply capacity of the economy and to drive productivity-enhancing economic reform.”

Joiner echoed this sentiment, warning that productivity growth and greater business investment would be necessary to support long-term growth.

“The medium-term problem for the Australian economy is just to encourage businesses to invest more so we have the capacity to expand in a way that would not put upward pressure on interest rates,” he said.

The RBA has acknowledged this issue previously, with deputy governor Andrew Hauser warning that the economy could be “boxed in” by its own capacity constraints, leaving little room for further interest rate cuts without significant improvements to productivity growth.

Household consumption grew 0.5 per cent in the September quarter, contributing 0.3 percentage points to GDP growth. This was driven by essential spending as households shelled out more on insurance, energy, rent, health and food while discretionary spending fell.

“There was a little bit of a slowdown [in discretionary spending] compared to the previous quarter because there were a few things in the previous quarter that were unusually good,” Joiner said.

“The proximity of Anzac Day and Easter like got people spending more than they otherwise would have. So there was a pullback in non-essential spending or discretionary spending in the household sector. But overall, the numbers were pretty good.”

Net trade detracted 0.1 percentage point from September quarter GDP growth as the quarterly increase in imports (1.5 per cent) outpaced exports (1.0 per cent).

Export growth was underpinned by favourable prices for Australian coal and heightened demand from countries including Japan, South Korea and China. This drove an overall run-down in inventories, which detracted 0.5 percentage points from annual GDP growth.

AMP’s Mousina and Bui added that GDP growth could slow as public investment was pared back in 2026, unless private investment picked up.

“Once public sector spending growth slows, GDP growth could go through a softer patch in 2026 unless the private sector (consumer spending and private business investment) picks up noticeably,” the economists said.