Australia’s economy may be entering a more prolonged slowdown, economists have warned, after March quarter GDP figures revealed weaker momentum in household spending, persistent productivity challenges and growing uncertainty around the inflation outlook.
The Australian Bureau of Statistics (ABS) reported gross domestic product grew 0.3 per cent in the March quarter and 2.5 per cent over the year, a marked slowdown from the 0.9 per cent quarterly growth recorded in the December quarter.
While household consumption rose 0.5 per cent during the quarter, economists cautioned that the result was flattered by a sharp increase in spending on electricity, gas and other fuels after government energy rebates expired.
Excluding that effect, underlying consumption growth was considerably softer. Household disposable income growth also slowed over the year, while the household saving ratio fell from 7.0 per cent to 6.2 per cent.
Judo Bank senior economist Matthew De Pasquale said the figures pointed to a more cautious consumer backdrop.
“Excluding this, consumption growth rose just 0.3 per cent, reflecting weaker discretionary spending.”
He said household savings buffers remained broadly intact but slowing income growth and the prospect of higher costs being passed through to consumers suggested spending behaviour could remain subdued throughout 2026.
The March quarter figures also highlighted the growing influence of artificial intelligence-related investment on the economy.
Private business investment rose 6.0 per cent during the quarter, driven by a 16.3 per cent increase in machinery and equipment spending as data centre construction accelerated across New South Wales and Victoria.
That strength, however, came with a corresponding surge in imports, limiting the overall contribution to economic growth.
Anthony Malouf, economist at Ebury, said the data centre buildout could ultimately prove more significant than the headline GDP result itself.
“Australia is rapidly establishing itself as a major hub for digital infrastructure, attracting large-scale investment from global players.”
He said the key question would be whether that investment ultimately delivers the productivity gains needed to lift Australia’s long-run growth potential.
“If AI-driven investment persists and ultimately lifts Australia’s chronically weak productivity, it would be a material development for the economy’s long-run potential, and raising the economy’s so-called ‘speed limit’.”
Productivity remains a concern for economists and policymakers alike. Despite some moderation in labour cost growth, unit labour costs remain elevated and productivity growth remains subdued.
“While this represents some improvement, weak productivity, labour market tightness, and the Fair Work Commission’s recent annual wage decision will likely limit further progress towards 2.5 per cent through 2026,” De Pasquale said.
The weak GDP outcome has also intensified debate over the Reserve Bank of Australia’s next move.
A 0.8 percentage point drag from net trade was one of the biggest surprises in the data, reflecting not only higher imports of data processing equipment but also stronger services imports.
Krishna Bhimavarapu, APAC economist at State Street Investment Management, said resilient domestic demand and faster wage growth could still keep inflation pressures elevated despite softer growth.
“We continue seeing at least one more hike this year but potentially backloaded now.”
Not all economists share that view, however. Malouf argued the economy is already slowing sufficiently to allow inflation to gradually return to target and expects rates to remain on hold through the remainder of 2026 and into early 2027.
Questions around inflation remain central to the outlook as rising wage costs, sticky services inflation and slowing economic activity have prompted some economists to warn that Australia could face a more challenging combination of weak growth and persistent price pressures.
VanEck head of investments and capital markets Russel Chesler said: “Australia could now be entering a stagflationary regime of low growth and high inflation.”
He said the recent Fair Work Commission (FWC) wage decision could add further pressure to services inflation, while weakening household finances and softer housing market conditions risk weighing on consumer sentiment.
“This environment reinforces our view that HALO companies, with heavy assets and low obsolescence, are well placed to continue outperforming the broader market.”
Despite those inflation concerns, Chesler said he does not expect the Reserve Bank to raise rates in June and believes the current cash rate may prove to be the peak of the cycle.
