Investment-led activity offsetting weaker household demand

GDP grew by 0.3% in the March quarter of 2026, down from 0.9% in the previous quarter, indicating that economic momentum is moderating. While annual growth remains relatively solid at 2.5%, recent data suggests activity is becoming increasingly concentrated in a limited number of sectors. RBA forecasts further easing over the remainder of 2026, reflecting softer domestic demand and a more challenging global environment.

Economic growth in the March quarter was primarily driven by private investment, particularly expenditure on machinery and equipment associated with data centre developments in New South Wales and Victoria. Public investment also remained supportive, underpinned by defence spending and ongoing infrastructure activity.

Household consumption increased in the March quarter, however, much of the increase was driven by spending on essential items such as energy and fuel, rather than discretionary consumption. Elevated interest rates and ongoing cost-of-living pressures continued to weigh on household budgets and consumer confidence.

Inflation is easing, though underlying price pressures remain elevated. Headline inflation moderated to 4.0% in May 2026, down from 4.2% in April, largely reflecting lower fuel prices driven by declines in global oil prices, alongside the reduction in fuel excise still in place. However, underlying inflation continues to trend upward, with trimmed mean inflation increasing to 3.6% year-on-year from 3.4%. This indicates that broader price pressures remain embedded in the economy, with earlier increases in fuel and transport costs continuing to flow through freight-intensive sectors such as logistics, parcel delivery and building materials.

In response to persistent inflationary pressures, the Reserve Bank delivered its third consecutive rate rise earlier this year. However, at its June meeting, the RBA paused further tightening to assess the impact of prior rate increases and evolving global oil supply conditions on the economy. While fuel prices have softened, underlying inflation remains sticky. Higher borrowing costs are expected to continue weighing on household spending and business investment, particularly in interest rate-sensitive sectors.

Labour market conditions have begun to soften, with the broader upward trend in unemployment still evident despite the headline rate easing slightly from 4.5% in April to 4.4% in May. Employment rose over the month, although gains were largely driven by part-time roles, with underemployment rate also edging higher, suggesting a degree of underlying spare capacity in the labour market. While labour market indicators continue to be closely monitored, inflation remains the central bank’s primary focus.

Looking ahead, economic growth is expected to moderate further as higher borrowing costs, persistent inflationary pressures and geopolitical uncertainty weigh on household demand and business activity. While public investment and a substantial infrastructure pipeline will continue to provide support, downside risks to the outlook have increased. Softer consumer spending and easing labour market conditions are likely to constrain broader economic momentum through the remainder of 2026.