Economic recovery is welcome but rebalancing still needed

"Today's national accounts data shows Australia's economic recovery still requires a rebalancing from the public to private sectors," said Innes Willox, Chief Executive of national employer association, Australian Industry Group.

Australian real GDP growth rose to 2.6% p.a. in the fourth quarter of 2025, driven by a restocking of inventories. Household consumption (2.4% p.a.) and business investment (4.4% p.a.) also showed positive signs of improvement.

Datacentre builds continue to be a key investment driver, with the ICT industry accounting for two-thirds of the uplift in non-mining capital expenditure across 2025.

However, government spending continues to be a major driver of the recovery, contributing 0.3% of the 0.8% growth during the quarter. This is unsustainable if we are to develop a prosperous economy for the long term.

Public final demand (0.9% q/q) grew at twice the rate of private (0.4% q/q), while employment growth in the government-supported non-market sector is still outstripping the market sector.

Alarmingly, there was zero productivity growth during the quarter, due to falling productivity in the non-market sector cancelling out improvements elsewhere. Australia's productivity remains stuck at 2019 levels.

"As growth gradually recovers, policymakers need to turn their attention to rebalancing the economy back toward productivity and the private sector," Mr Willox said.

"Government stimulus may have been justifiable when growth was low, but it is now proving an obstacle to durable economic recovery.

"Rising government spending is contributing to our inflationary woes shrinking real wages, while constraining the private sector's efforts to raise productivity. Nor is it fiscally sustainable given the widening structural pressures on state and federal budgets.

"With the growth rate now having pushed well past the capacity limit imposed by our weak productivity, it is past time to rebalance the economy towards the private sector. Productivity, fiscal sustainability, improving living standards, enhanced business conditions and a durable economic recovery all demand it," Mr Willox said.

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Restocking and govt spending drives growth

The key driver of increased growth in Quarter 4 was inventories, with restocking contributing 0.4% of the 0.8% growth in the quarter.

Public spending also contributed 0.3% to growth, as government consumption and investment continued to rise.

Small lifts in business investment and households consumption also supported growth, but made a relatively minor contribution.

This points to an ongoing reliance on increasing government spending to maintain growth momentum in the Australian economy.     Contributions to GDP growth Q4 2025.

Datacentres continue to drive investment

Business investment lifted 4.4% p.a. in Quarter 4, maintaining momentum seen across 2025.

Much of lift was due to datacentre building, which has surged over the last two years.

ICT investment (a proxy for datacentre building) accounted for two thirds of the growth in non-mining capital expenditure in 2025, up from negligible levels two years ago.

While a welcome addition, this reveals the uplift in investment is highly reliant on the datacentre boom associated with expected future AI uptake.

Economy still relies on non-market sectors

Output increased 2.5% p.a. in the market sector ex mining in Quarter 4, up from 2.2% the quarter prior.

Growth in non-market industries – education, public admin and healthcare – eased from 2.3% to 1.9%

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.

Manufacturing, retail and construction continue to have low growth rates, pointing to ongoing weakness in key industries.

For further information or assistance please contact: 
economics@australianindustrygroup.com.au 
https://www.aigroup.com.au/resourcecentre/research-economics/