Economy rebounds

Australia’s economy grew by 0.6 percent in the June quarter and 1.8 percent over the year, marking a modest rebound after a subdued start to the year. Economic activity was impacted in March by severe weather events, including Tropical Cyclone Alfred, which affected parts of Queensland and New South Wales. However, the June quarter saw a lift in demand for goods and services, particularly in regions undergoing reconstruction and recovery, which helped support overall growth.

Household and government spending were the main contributors to Australia’s economic growth during the quarter. Household consumption rose by 0.9 percent, supported by interest rate cuts in February and May, which boosted purchasing activity, particularly in non-essential categories. This rebound in consumer spending kept interest rates on hold in the Reserve Bank of Australia’s (RBA) September meeting, signalling improved consumer confidence and resilience in domestic demand.

Government spending also increased due to higher social benefits and national defence spending, rising by 1.0 percent and further supporting overall economic activity. Public investment, however, declined for a third quarter and was the largest detractor from growth, as several major infrastructure projects reached completion.

Labour market conditions continue to cool, with the unemployment rate rising to 4.5 percent in September from 4.3 percent in August. This marks a four-year high and reflects a pace of softening that is faster than the Reserve Bank had anticipated. This rise in unemployment has strengthened market expectations of a rate cut this year, despite stronger-than-anticipated GDP figures earlier in the quarter.

Inflation continued to ease in the June quarter, with headline consumer prices rising at an annual rate of 2.1 percent, down from 2.4 percent in the March quarter. This marks the lowest annual inflation rate since the March 2021 quarter. Underlying inflation also moderated, falling from 2.9 percent to 2.7 percent. Electricity rebates remained in place across most capital cities, helping to contain annual inflation.

Looking ahead, growth in Australia’s major trading partners is expected to slow in Q4 2025 and into 2026. Recent tariff escalations between the United States and China, including new U.S. duties on Chinese imports and China’s export restrictions on critical minerals, are weighing on global demand and posing downside risks for Australian exports. These pressures, combined with volatility in global financial markets and uncertainty around the US’ monetary policy continue to present challenges.