Australia’s GDP grew 0.6% but temporary factors like election spending mask underlying weakness, warns CreditorWatch’s Ivan Colhoun. Rate cuts coming?
What’s happening: Australia’s economy grew 0.6% in the June quarter, beating forecasts of 0.5%, but the apparent strength masks underlying weakness driven by one-off factors including election spending, military exercises, and even a severe flu season.
Why this matters: The temporary nature of these growth drivers suggests the economy remains fragile, potentially pushing the Reserve Bank towards earlier interest rate cuts to prevent unemployment from rising significantly.
Australia’s June quarter GDP figures delivered a pleasant surprise on paper, but the reality beneath the numbers tells a more concerning story about the nation’s economic trajectory.
The 0.6% quarterly growth that exceeded economists’ expectations of 0.5% came with a caveat that should worry business leaders: it was largely artificial.
Special factors at play
According to Ivan Colhoun, Chief Economist at CreditorWatch, the stronger-than-expected result was “largely driven by temporary factors, suggesting the economy is not genuinely gaining momentum.”
These one-off boosts included weather-related bounce-backs in exports and consumer spending, Federal election expenditure, end-of-financial-year sales driving purchases of cars, furniture and electrical goods, military exercises, tourism spending around Easter and ANZAC Day, and even higher health expenditures due to a worse-than-normal flu season.
“There was a host of special factors impacting the data this quarter, most of which acted to boost growth temporarily,” Colhoun explained.
Meanwhile, the more fundamental components of economic activity told a different story. Dwelling construction managed only 0.3% quarterly growth, private investment softened as mining and renewable energy projects neared completion, and public investment declined as major government infrastructure and health projects wound down.
The domestic final demand deflator, the price measure closest to the Consumer Price Index, increased by 0.7% for the third consecutive quarter, reaching 3% annually – well above the Reserve Bank’s preferred midpoint of its 2-3% target range.
Non-mining stays strong
Perhaps the most intriguing aspect of Australia’s current economic puzzle is why unemployment has remained relatively low despite 2024-25 real growth of 1.3% representing the weakest expansion outside the pandemic since the early 1990s recession.
Colhoun’s analysis points to ongoing resilience in non-mining sector profitability. “When we look at overall company profits, the main decline in profitability reflects lower mining profits due to lower commodity prices. The profits of other incorporated companies have generally continued to rise,” he noted.
This profit resilience in sectors that drive employment helps explain why businesses haven’t started significant layoffs despite the broader economic weakness. Australia’s mixed economic conditions have been affecting businesses differently across sectors, with some maintaining strength while others struggle.
Rate cuts likely
The combination of temporary growth factors and underlying economic softness is building pressure on the Reserve Bank to act more decisively on interest rates.
The RBA has maintained the cash rate at 4.35% since February 2024, but Colhoun believes earlier intervention is needed to prevent unemployment from rising sharply.
“I’d prefer these cuts are made earlier to minimise any forthcoming rise in unemployment,” he said, suggesting the central bank should “deliver some extra interest rate support sooner rather than later.”
The timing could accelerate if labour market conditions deteriorate faster than expected. “A further rate cut in September would increase in probability if the August unemployment rate was 4.4%,” Colhoun warned.
With the RBA’s own forecasts assuming two further rate cuts will be required, the question appears to be timing rather than whether cuts will occur. Small businesses have been particularly affected by high interest rates and inflation, making earlier relief potentially crucial for maintaining business confidence and employment.
What happens next
The challenge for policymakers is distinguishing between genuine economic momentum and statistical noise. While headline growth numbers might suggest the economy is strengthening, the temporary nature of recent drivers suggests otherwise.
Productivity growth remains “very slow” according to Colhoun’s analysis, indicating deeper structural issues that monetary policy alone cannot address.
For businesses, the key takeaway is that despite apparently positive GDP numbers, the underlying economic environment remains challenging. The temporary factors that boosted June quarter growth are unlikely to repeat, potentially leaving the economy more vulnerable to weakness in coming quarters.
The Reserve Bank’s response to emerging labour market data will likely determine whether Australia can navigate this period of economic uncertainty without a more significant downturn in business conditions and employment.
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