The country is entering a new phase of economic expansion, with households set to take the lead, supported by falling interest rates and moderate wage increases, while government spending eases following a year of strong growth. Analysts believe private consumption might soon become the main contributor to economic output, though risks remain as the labour market evolves and public sector investment stagnates.
Throughout the past year, economic growth was largely supported by strong government spending, particularly in social services and public sector wages. However, that driver is now weakening. According to the latest data from the Australian Bureau of Statistics, government contributions to GDP were minimal in the June quarter, as investment fell enough to counterbalance ongoing recurrent spending.
GDP likely rose by 0.5% in the June quarter, bringing annual growth to 1.6%. Economists point out that this modest increase occurred despite flat government outlays. Public expenditure, which includes the $52 billion National Disability Insurance Scheme, recently reached close to 28.5% of GDP. This suggests it may have peaked, possibly creating room for private sector activity without putting upward pressure on inflation.
Consumer activity is showing signs of revival. Adjusted for inflation, household retail sales grew by 0.5% in the June quarter. Interest rates are beginning to decline, with markets expecting two additional rate cuts before March, and inflation has returned to the Reserve Bank's 2 to 3% target range. This combination of lower borrowing costs and stronger real incomes appears to be boosting consumer sentiment, though households are still displaying cautious saving behaviours.
Business investment and residential construction have made modest contributions, while defence spending dropped sharply by over 20% last quarter. In addition, trade added just 0.1 percentage points to GDP, mainly due to an increase in tourist arrivals from New Zealand. Private inventory reductions slightly exceeded additions to government stockpiles, which weighed on overall economic figures.
If these patterns persist, Australia may be heading towards a more balanced recovery led by the private sector. However, this transition could be uneven, particularly as the employment landscape changes and the effects of earlier fiscal support diminish. For now, household spending is emerging as the key driver of momentum.
