"Today's national accounts data shows that the recovery in private sector activity has a narrow and fragile base," said Innes Willox, Chief Executive of the national employer association, Australian Industry Group.
Australian real GDP growth rose to 2.1% p.a. in the third quarter of 2025, driven by a pickup in private business investment and household spending.
However, the composition of these growth figures shows the recovery has a narrow base. Private investment surged by 2.9% in the quarter, but approximately half can be attributed to a boom in datacentre building.
Many market sector industries – including professional services, manufacturing, construction and retail – remain weak or in contraction.
Government spending continues to provide a lifeline, contributing 0.3% to quarterly GDP growth. Public final demand grew faster (1.2%) than private final demand (1.1%), while the government-supported non-market sectors contributed around half the uplift in employment.
"It is positive to see an uptick in private sector activity, but it remains far from broad-based. Datacentre investments are critical for our technological future, but are not on their own a durable foundation for growth," Mr Willox said.
"The boom in datacentre building poses questions of its own in terms of future energy needs. With Australia's energy systems already under considerable stress, it is imperative we get our energy policy settings right and quickly for our existing and emerging industries.
"Nor is the handover from public- to private-led growth yet complete, with government spending continuing to make an outsized contribution to economic activity. With the federal and state budgets under structural pressure, these levels of public spending cannot be sustained indefinitely.
"Sadly, our productivity crisis continues, with labour productivity growing only 0.1% in the quarter. Productivity remains stuck at the levels of late 2019.
"With the growth rate now pushing towards the capacity limits of the Australian economy, there is a risk the recent uptick in inflation becomes entrenched. This makes near-term rate cuts a remote possibility, and will limit the RBA's options over the coming year," Mr Willox said.
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Private sector recovery commences
Improving GDP growth in Quarter 3 was driven by the private sector, but the public sector continues to be a critical growth support.
Private investment added 0.5% to quarterly growth, while household spending added 0.3%.
Reduced inventories and weakening trade cancelled out the private sector contribution
Government spending added 0.4%, evenly spread between investment and consumption.
Despite the private sector uplift, government spending continues to be critical in maintaining economic momentum.
Datacentre boom drives investment uplift
Business investment grew by 2.9% in Quarter 3, a material rise from 0.2% in the previous quarter.
This was driven by surging datacentre builds. Equipment capex by the ICT sector (a proxy for datacentre investment) has grown six-fold over the last two years.
We estimate the datacentre boom directly contributed around half ($1.3 billion) of the private investment uplift in Quarter 3.
Absent this datacentre lift, GDP growth would have been 0.2% rather than 0.4% in Quarter 3.
Economy still relies on non-market sectors
Output increased 1.9% p.a. in the market sector in the Quarter 3, up from 1.8% the quarter prior.
Growth in non-market industries – education, public admin and healthcare – eased from 3.2% to 2.3%
This points to a gradual handover from the public to the private sector as an engine of growth, but a full rebalancing is yet to occur.
Industrial sectors continue to show marked weakness, with manufacturing and mining in contraction with construction growth was weak.
For further information or assistance please contact:
economics@australianindustrygroup.com.au
https://www.aigroup.com.au/resourcecentre/research-economics/
