GDP figures show 2.1% annual growth. Economic analysis by Ivan Colhoun shows why rate cuts may be further away than hoped.
What’s happening: Australian Bureau of Statistics Private investment surged, driven by data centre expansions supporting artificial intelligence and cloud computing capabilities, whilst housing construction and essential household spending also contributed to growth.
Why this matters: The underlying economy shows stronger momentum than headline figures suggest. Temporary mining maintenance subtracted 0.5 percentage points from growth, masking solid progress in consumer spending, business investment and housing construction.
Australia’s economy delivered steady growth in the September quarter 2025, but the headline 0.4 per cent quarterly figure disguises a more complex and ultimately stronger economic picture, according to analysis from leading economists.
Grace Kim, ABS head of National Accounts, said economic growth was steady in the September quarter 2025, matching the average quarterly growth since the end of the COVID-19 Pandemic.
However, CreditorWatch Chief Economist Ivan Colhoun argues the soft headline is misleading. Temporary mining maintenance wiped 0.5 percentage points off growth, masking solid momentum in housing construction, consumer spending and business investment.
Data centres power growth
The standout performer was private investment, which contributed 0.5 percentage points to GDP growth in the September quarter, driven by machinery and equipment investment, which rose 7.6 per cent.
“The rise in machinery and equipment investment reflects the ongoing expansions of data centres. This is likely due to firms looking to support growth in artificial intelligence and cloud computing capabilities,” Kim said.
The data centre boom represents a fundamental shift in Australia’s economic landscape. Investment in these facilities has surged as businesses race to build infrastructure capable of supporting AI workloads and cloud computing demands.
This technology-driven investment wave has transformed Australia’s position in the global digital economy. Major players including Amazon Web Services have committed a record $20 billion to expand data centre infrastructure across Sydney and Melbourne from 2025 to 2029, whilst Microsoft, AirTrunk, and NEXTDC have also made substantial commitments to the sector.
Housing investment added another 0.2 percentage points to GDP growth, with a rise in dwelling construction and high real estate turnover due to increased investor demand for housing.
Mining maintenance masks momentum
The softer headline figure resulted primarily from temporary factors rather than underlying weakness. Mining production fell with increased maintenance at both iron ore and LNG sites, driving an overall rundown in inventories which detracted 0.5 percentage points from GDP growth.
Colhoun emphasises that taking the mining inventory rundown into account, along with adjustments for illicit tobacco sales not captured in official data, the RBA forecasters will likely conclude that growth is already running slightly above the recently re-estimated 2.0 per cent potential growth rate.
“The soft GDP headline is misleading,” Colhoun wrote in his analysis. “Temporary mining maintenance wiped 0.5 percentage points off growth, masking solid momentum in housing construction, consumer spending and business investment.”
Public investment also rebounded strongly, rising 3.0 per cent in the September quarter, following a 3.5 per cent fall in the June quarter, driven by investment in renewable energy, water, telecommunications and rail transport projects.
Households tighten spending
Consumer behaviour showed a nuanced picture, with households prioritising essential spending whilst pulling back on discretionary purchases.
Household spending rose 0.5 per cent in the September quarter following a 0.9 per cent rise in the June quarter. Essential spending was up 1.0 per cent, driven by payments for banking and superannuation services, electricity and health.
In contrast, discretionary spending dropped 0.2 per cent in the September quarter, following strong growth in the June quarter driven by Easter holiday spending and end-of-financial-year sales.
The household saving ratio climbed to 6.4 per cent from 6.0 per cent in the previous quarter, reflecting households building financial buffers. Gross disposable income rose 1.7 per cent, faster than the rise in nominal household spending of 1.4 per cent, driven by minimum wage rises along with increased bonuses and redundancy payments in the private sector.
For the first time, the ABS incorporated rooftop solar electricity generation into the National Accounts. Whilst the direct impact on GDP is minimal, the change highlights significant household benefits. Household solar accounted for approximately 8.0 per cent of total electricity production in 2024-25, with additional analysis showing that rooftop solar electricity saved households over 3 billion dollars in 2024-25.
Rate cuts unlikely soon
The stronger-than-expected underlying activity presents a challenge for those hoping for further interest rate reductions. With annual GDP growth of 2.1 per cent now exceeding the RBA’s estimate of potential growth, and inflation measures in the report remaining high, monetary policy easing appears increasingly distant.
Reserve Bank of Australia Governor Michele Bullock cautioned that the economy had likely hit its potential growth limit at a time when inflation has been staying above the bank’s target.
Colhoun’s analysis points to mounting concerns about the inflation trajectory. “It’s too early for inflation to have reaccelerated cyclically, so the more reasonable explanation is that inflation hasn’t been sustainably returned to target,” he wrote. “If the RBA believes the economy is beginning to strengthen durably, then the unfortunate conclusion with inflation above target, is that perhaps policy cannot be maintained at the current level.”
Harry Murphy Cruise, head of economic research for Oxford Economics Australia, said the economy is in good shape, noting that with inflation rising and domestic momentum building, the central bank has its work cut out for it, stating that rate cuts are off the table for some time.
The September quarter data reveals an Australian economy navigating multiple crosscurrents. Technology-driven investment in data centre infrastructure continues to surge, housing construction has rebounded, and household incomes are growing. However, with inflation still elevated and the economy potentially operating at capacity, the path ahead requires careful navigation by both policymakers and businesses.
For Australian businesses, the message is clear: the economy shows underlying strength, but higher interest rates may persist longer than many had hoped. Those positioning themselves to benefit from the AI and digital infrastructure boom, whilst managing costs carefully, are likely to be best placed for the conditions ahead.
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