Q2 GDP Partials & Forecast Update
We have left our June quarter GDP nowcast unchanged at 0.4%qtr and 1.3%yr in six-month annualised terms. Public demand surprised to the downside and was offset by a stronger contribution from net exports.
Q2 GDP Forecast Update
The Australian economy is expected to have grown 0.4%qtr and 1.3%yr in six-month annualised terms over the June quarter 2025.
We have left our June quarter GDP nowcast unchanged (see here). The bigger than expected fall in public investment was partly offset by a stronger contribution from the external sector. The contribution of inventories came in broadly as expected, with the build-up of public inventories offsetting the rundown on the private side (see here).
There is some downside with our estimate rounding to a touch below 0.35%qtr. However, given the less than full coverage across the partial indicators and the possibility of revisions to previous quarters which would impact growth rates, we have stuck with the estimate in our preview.
While some of the weakness this quarter is likely to be temporary (i.e. the rundown in private inventories), it is undoubtedly the case that underlying growth remains sluggish.
The domestic demand impulse (spending by consumers, businesses, and governments) is expected to have grown 0.4%qtr in Q2 and just 0.6% over the first six months of 2025. While the consumer looks firmer, the overall growth impulse is being weighed down by a lack of business investment and the faster than expected pullback in public infrastructure investment – on today’s numbers, new public investment has fallen around 6.0% over the past two quarters.
New public demand lifted 0.2%qtr and will make a slight 0.1ppts contribution to growth in Q2. This was a touch weaker than our expected 0.4%qtr lift over Q2, with investment surprising to the downside.
When it comes to the more volatile components of GDP, we continue to expect a flat contribution from net exports and inventories. The external sector is now expected to contribute around +0.1ppts to growth in the June quarter. This will be fully offset by a rundown in total inventories, which will detract -0.1ppts from growth over Q2.
As always, these ‘partial’ indicators should be treated with caution. They are not always a reliable guide to national accounts components and there are significant areas that do not have regular partial measure.
What does all this mean?
Australia’s underlying growth impulse remains sluggish and unconvincing. Without a material pick-up, labour supply will at some point outpace growth in labour demand, potentially leading to slack in the labour market, in the near term.
This risk is exacerbated by the evolving relationship between activity and employment growth – the expansion in the non-market sector delivered jobs intensive economic growth, as the economy rebalances toward private drivers of growth, this relationship is likely to become less job intensive.
Public Demand
Following the fall recorded last quarter (-0.6%qtr), in the June national accounts we expect to see new public demand only partly retrace this dip and grow 0.2%. New public demand as a share of GDP is expected to fall from a record high of 27.6% to around 27.2% in Q2.
Today’s data showed that public investment was the primary drag. As the pipeline of public investment projects turns lower, this is feeding through into weaker activity. This quarter new public investment declined 3.4%qtr to be 2.9%yr lower in annual terms. The decline was shared across all levels of government (both defence and non-defence at the Federal level). Public corporations provided an offset, with investment 2.6%qtr higher.
Public consumption rebounded after last quarter’s sluggish outcome. There were gains across defence and non-defence Federal spending as government programs such as the NDIS continue to expand and the final rounds of cost-of-living support flows out the door. At the state and local level, consumption slipped, down 0.3%qtr in Q2.
Government borrowing was $17.4bn in Q2, equating to a little under $800 for each member of the working age population. This marked a sharp increase from the $4.4bn recorded in Q2 2024.
External Sector
The headline current account balance for the June quarter came in at -$13.7bn, which was more favourable than both our nowcast and market expectations. It represented a small improvement from the March quarter’s $14.1bn deficit, which is now deemed to be about $0.6bn smaller than estimated three months ago, thanks to upward revisions to services and primary income balances, partially offset by a lower goods trade balance estimate.
Among key components, the primary income balance continued its improvement from the previous period, with the deficit shrinking by $1.2bn to $16.8bn, the lowest level since late 2021. This was largely due to a $1.1bn increase in income inflows, attributed to higher profits on Australia’s direct investment holdings. Returns on portfolio investment holdings remained relatively unchanged.
The nominal trade surplus declined by $1.2bn, reaching $3.1bn. Lower export prices accounted for much of this shift: the terms of trade – the ratio of export to import prices – fell by 1.0%qtr, driven by a 1.7%qtr decrease in exports prices.
In real terms, however, the trade balance improved slightly. Real exports grew by 1.7%qtr outpacing the 1.4%qtr rise in imports. Major commodities – mainly iron ore and LNG – were responsible for higher exports. Notably, coal exports failed to recover after an almost -8% decline last quarter, when weather-related events disrupted coal production and exports. They were down a further 2.3% this quarter. On the imports side, goods inflows picked up by 0.8%qtr, extending the upward trend for the third consecutive quarter.
With regards to services exports, the 3.0%qtr decline in the March quarter was revised away, and the June quarter brought a steep increase, by 3.3%qtr, driven by education exports, which account for more than a third of the total services exports, and higher tourism. The ABS highlighted an increased number of visitors from New Zealand, as one of the factors. Meanwhile, on the imports side, services outflow jumped 3%qtr, partly explained by high travel services, boosted by more Australians travelling to Europe for holidays.
Overall, today’s figures indicate that net trade will provide 0.1ppt contribution to the June quarter GDP growth, which is a notably bigger support in comparison to the March quarter. Following the revisions, the prior quarter’s net export contribution GDP growth is now -0.2ppt rather than previously reported -0.1ppt.
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