Restocking and govt spending lifted growth
Australia’s economy grew 2.6% in the December quarter, up from 2.1%, marking the strongest pace in nearly three years and exceeding expectations.
Growth in this quarter was driven mainly by inventory restocking, which contributed 0.4% of the 0.8% quarterly rise, while public spending added 0.3%.
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.
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.
Wage growth falling behind inflation
Wages grew 3.4% over the year in Q4 2025, but with inflation rising to 3.6%, real wages declined for the first time in two years.
Outcomes varied sharply across sectors: private‑sector wage gains were outpaced by inflation, leading to real wage falls across all major industries, particularly manufacturing and retail. In contrast, public and publicly funded sectors recorded stronger wage growth-3.7% to 4.1%.
This highlights a two‑speed labour market, with stronger public‑sector wage gains and weaker real wages in the private sector.
Economy still relies on non-market sectors
Market‑sector output excluding mining grew 2.5% over the year in December quarter 2025, up from 2.2% previously, while growth in non‑market sectors such as education, public administration and healthcare eased from 2.3% to 1.9%.
This suggests a gradual shift in momentum from public sector driven to private sector driven growth, though a full transition has yet to occur.
Meanwhile, manufacturing, retail and construction continue to record weak growth, signalling ongoing softness in key industries.
Shrinking margins threaten growth and jobs
ABS data shows average operating margins (excluding mining) declined from 10.7% to 10.5%, with most industries experiencing further pressure, particularly manufacturing and construction.
Rising costs—especially wages, which increased 5.2% against a 4.2% rise in sales—were the main driver. With productivity having been weak for two years, these higher labour costs are eroding profitability.
If margins remain compressed, businesses are likely to adopt a defensive, cost‑focused stance, limiting their capacity to invest or expand employment.
Services boosted household spending
According to the ABS data, household spending rose 0.3% in January 2026 after a 0.5% fall in December, and annual spending remains 4.6% higher than a year earlier.
The January increase was driven by a 1.0% lift in services, particularly digital streaming, travel services, and dental care. Goods spending fell 0.3%, mainly due to lower motor vehicle purchases and reduced spending on recreation and culture goods.
Non-discretionary spending grew 0.8%, supported by health services and motor vehicle repairs. Discretionary spending edged up 0.1%, led by air travel, personal items, and recreational and cultural services.
