Q4 GDP Nowcast Revised Higher on Firmer Public Demand
We have revised our December quarter GDP nowcast higher, reflecting firmer public investment (+0.1ppts) and a larger contribution from public inventories (+0.2ppts). The latter largely represents a payback from the drag recorded last quarter, rather than a signal of stronger underlying activity.
Q4 GDP Forecast Update
Australia’s recovery accelerated sharply over the final quarter of 2025, with the economy expanding an estimated 1.1%qtr to be up 2.6%yr in year‑ended terms – the strongest quarterly growth rate since December quarter 2016 outside of the covid pandemic.
We have revised our December quarter GDP nowcast higher on the back of firmer public demand and a faster rebuild in public inventories. On the demand side, public investment rose 0.9%qtr in Q4, despite a sharp fall in public infrastructure work (–3.8%qtr). Instead, strength was concentrated at the federal level, with solid growth in defence investment (7.1%qtr) and investment by federal public corporations (6.1%qtr). This more than offset the drag from state and local general government investment (–1.4%qtr) and state public corporations (–3.3%qtr).
Looking ahead, we expect public investment to remain elevated at a high level. Upcoming Budget documents will be key in determining whether the federal government intends to ramp up investment in areas such as housing, renewables and defence, particularly as capacity pressures ease with state infrastructure work coming off. To date, off‑budget spending in these areas has consistently undershot forecasts, possibly reflecting capacity.
Given this update, the domestic demand impulse (spending by consumers, businesses and governments) is now expected to have grown a solid 0.8%qtr in Q4 and 2.8% in year‑ended terms. This is around 0.1ppts stronger than we expected in our preview (see here (PDF 438KB)).
More broadly, the Q4 National Accounts are likely to show that the handover in the drivers of growth from public to private demand has been firmer than anticipated on both sides. New public demand is expected to have grown 0.9%qtr and 1.7%yr in Q4, slightly outpacing new private demand, which is forecast to have increased by 0.8%qtr and 3.3%yr.
In contribution terms, the public sector is expected to have added a solid 0.5ppts to GDP growth in Q4 2025. Around 0.2ppts of this reflects a rebuild in public inventories. As a result, we now expect the more volatile components of GDP to contribute around 0.3ppts to growth in Q4, up from 0.1ppt in our preview.
The total build‑up in total inventories is now expected to contribute around 0.4ppts to growth over the quarter, while the external sector is expected to detract 0.1ppts. This largely reflects a payback from the previous quarter, when inventories were run down and subtracted around 0.5ppts from GDP growth, rather than a material shift in underlying economic activity.
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 of activity for which regular partial measures are not available.
Public Demand
Following some weakness in the first half of 2025, new public demand rebounded strongly, expanding by 1.3%qtr in the September quarter. The lift was driven largely by public investment, as a number of new projects came online. Much of this momentum carried into the December quarter, with new public demand rising a further 0.9%qtr.
New public investment increased by 0.9%qtr, with strength particularly evident at the federal level. Investment in national defence rose 7.1%qtr, while investment by federal public corporations increased by 6.1%qtr. Looking ahead, a still‑sizeable pipeline of projects should keep the level of public investment elevated, but growth should continue to moderate.
Public consumption rose 0.9%qtr in the December quarter, easing slightly from the 1.1% pace recorded in September. Growth was driven by both state and local governments (1.0%qtr) and the federal government (0.8%qtr), with the latter supported by a solid increase in defence spending (2.1%qtr). Cost-of-living support measures have largely come to an end but programs such as the NDIS could continue supporting government spending going forward.
Government borrowing totalled $15.7bn, down around $2.6bn from a year earlier and $28.7bn from the September quarter. This equates to just under $700 per working‑age Australian.
External Sector
The Balance of Payments data suggested that the external sector weighed on growth in the December quarter. Net trade will subtract 0.1ppt from quarterly GDP growth – an unchanged contribution from the previous quarter and the third negative result in 2025. While this outcome was slightly weaker than our expectation, it was well above the market consensus of -0.3ppt. Goods trade subtracted 0.2ppt, offset by a positive 0.1ppt contribution from services.
Export volumes increased by 1.4%qtr, with both goods and services outflows rising by more than 1.0%qtr. Major commodity exports climbed 1.8%qtr, driven by strong demand from China for iron ore (up 3.9%qtr), while coal (down 0.3%qtr) and LNG (down 0.4%qtr) exports edged slightly lower. Rural goods exports growth remained robust, though somewhat below our expectations, marking a significant increase for the fifth time in the past six quarters. Travel services rose by 0.6%qtr, despite a decline in education exports, which account for over a third of total services exports. Other services exports rose 1.1%qtr, supported by ongoing growth in software licensing.
On the imports side, goods import volumes increased by 2.7%qtr, a pace similar to the September quarter. Despite steep declines in data processing equipment and the civil aircraft & confidentialised items categories, capital goods imports posted a modest increase, broadly consistent with the increase in business capex reported by the ABS last week. Intermediate goods imports grew by 2.1%qtr after nearly 5%qtr growth in the September quarter.
Consumer goods imports advanced 2.5%qtr, among the strongest results in recent years, which broadly aligns with our expectations for robust consumer spending growth at the end of 2025. Within consumer goods, clothing & footwear and household electrical items led the increase. The ABS reported record smartphone imports, driven by improvements in the latest models. Gold imports, typically a small share of overall imports, surged by more than 40%qtr, accounting for nearly a third of the total increase in imports.
On a nominal basis, the current account balance deteriorated to -$22.1bn, the largest deficit in a decade. Among the components, the headline trade balance was little changed from the downwardly revised September quarter estimate, at $1.3bn. The goods trade surplus narrowed for the fourth consecutive quarter to $9.7bn, but this was offset by a smaller services deficit of $8.4bn. Changes in the primary income balance were more significant – not only was the September quarter deficit revised higher, but it also showed a marked deterioration in the December quarter to -$21.7bn, mainly due to increased returns on foreign-owned assets.
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