Sluggish recovery ahead
In the March quarter of 2025, Australia’s real GDP growth rate was unchanged at 1.3% p.a., falling short of projections, which had anticipated a climb to 1.5%.
The government stimulus that drove growth for much of 2024’s was withdrawn in the quarter. However, no substantial rise in private sector activity, the recovery in growth rates stalled.
Australia’s GDP growth is projected to be to just over 2.0% p.a. by mid-2026. However, the impact of US tariffs and other countries’ responses mean there is considerable uncertainty over the outlook.
Weak investment, dim productivity
The private capital spending declined slightly by 0.1% in the first quarter of 2025 compared to the same period last year. However, investment in the non-mining market sector experienced a more pronounced drop of 1.1%.
After a post-pandemic surge, capex growth has slowed since early 2024. Equipment and machinery investment fell 2.5% in Q1 2025 from a year earlier, underperforming the overall trend.
Persistently weak investment continues to weigh on productivity, signalling that a 2025 rebound remains highly uncertain.
Energy cost drives input surge
Since the pandemic, Australian manufacturing input prices have risen sharply, with gas inputs showing the most significant increase.
The sharp rise in gas and manufacturing input costs has significantly outpaced the more moderate increases in consumer and industrial goods prices, highlighting growing cost pressures on producers.
Although final goods prices have remained relatively stable, the sustained rise in input costs - particularly energy - suggests potential inflationary pressures and challenges for manufacturers in maintaining margins.
Government-led jobs growth stalls
In March 2025, Australia shed 25,000 jobs, the first declines since 2016 outside the pandemic.
Over the past two years, private sector job growth has stalled, with nearly all gains driven by government-supported roles. As those jobs declined in early 2025, Australia’s 13-quarter streak of employment growth ended.
Falls were recorded in retail, health care and social assistance, and transport sector. It was the first decline in filled roles for health care and social assistance since mid-2020, despite overall growth in the past year.
Market sectors remain weak
Market sectors are undergoing slowdown compared to the steadier performance of non-market sectors.
Industry output saw a modest rise in the March quarter, with value-added growth at 1.3% annually. Non-market sector growth was a 2.6%, compared to only 0.9% in market sector industries.
Several industrial sectors –mining, manufacturing, professional services and accommodation and food – were especially weak, either reporting flat or contracting output.
This suggests that many industrial sectors in Australia continue to face subdued business conditions.
US tariffs shift exports
Australian exports to the US surged in early 2025, tripling to $6 billion per month before sharply dropping in April when new tariffs took effect - clear signs of exporters rushing shipments ahead of the deadline.
At the same time, exports to China fell by a similar amount, indicating a diversion of goods from China to the US to capitalize on the tariff-free window.
While the overall trade impact has so far balanced out, the scale is significant - $4 billion per month in redirected exports equates to about 1.75% of GDP annually. Trump’s tariffs on the US, are expected to significantly impact Australian machinery sector.
