Q1 GDP Partials & Forecast Update
We have revised our expectation for Q1 GDP lower, reflecting a softer contribution from the government sector. Today’s data confirms that the economy was slowing before the conflict in the Middle East had really started to impact. That impact is expected to see a more material weakening in Q2 2026 with the possibility of an outright contraction.
Q1 GDP Forecast Update
We expect the Q1 2026 National Accounts to show that Australia’s economy expanded just 0.3% over Q1 2026 and 2.4% in year-ended terms – the softest quarterly growth rate since Q2 2024. This is a material step down from the 0.8%qtr recorded in Q4 2025 and consistent with Westpac-Now which suggested Australia’s cyclical upturn had come to an end well ahead of this quarter’s partial economic indicators.
We have revised our Q1 GDP nowcast lower on the back of softer than expected contribution from the government sector. Compared to our Q1 GDP preview, growth in public demand surprised slightly on the downside (flat vs expected 0.4%qtr) with the roll off in Federal government electricity rebates combining with a softer picture around other spending leading to the first quarterly fall in public consumption since Q3 2022. Without this roll off, public consumption would have grown by around 0.3%qtr in Q1 2026 – still slow compared to the 1.0%qtr quarterly average growth rate recorded over the past two years.
In addition, the drag from the rundown in public inventories (likely reflecting the unwind of the build-up in non-monetary gold we saw in Q4 2025, which is consistent with the almost 20% pick up in net exports of gold) was larger than expected, detracting 0.3ppt from growth in Q1 (vs an expected 0.1ppt detraction).
While today’s data showed that the drag from net exports was larger than expected (-0.8ppt vs expected -0.6ppt), this was fully offset by a build-up in mining inventories. In other words, mining production was as expected, what surprised was how much of this output is sitting in storage or at the ports across the country given weather disruptions.
So where does this leave us? Today’s data confirms that the economy was slowing before the conflict in the Middle East, or the rate hikes in February, March and May, had really started to impact. The significant headwinds from the conflict will be more fully reflected in Q2 2026, with the possibility of a quarterly contraction which would be the first quarterly decline since the GFC (excluding COVID).
Data centre ramp up takes centre stage as growth slows elsewhere
Given this update, the domestic demand impulse (spending by consumers, businesses and governments) is now expected to have grown a solid 1.1%qtr in Q1 and 3.6% in year-ended terms. This is broadly in line with what we expected in our preview.
Investment in data centres will be the big story this quarter. New business investment is expected to accelerate by a whopping 6.0%qtr and 10.3%yr – the strongest quarterly growth since the start of 2012, when the second wave of the mining investment boom was topping out. Investment in machinery & equipment is likely to have grown by close to 13.0%qtr, the strongest rate since Q4 2009, when the government introduced temporary tax incentives in response to the GFC.
Outside of data centre investment the picture is soft with household consumption, dwelling investment and public demand all showing signs of slowing.
We expect new private demand to grow a very strong 1.6%qtr and 4.2%yr in Q1, comfortably outpacing growth in new public demand (flat and 2.4%yr).
The external sector and changes in inventories are expected to detract around 0.9ppts from growth in real GDP in Q1 2026 on a combined basis. While this is around 0.2ppts worse than expected in our preview due to exports, it is fully offset by a build-up in mining inventories.
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
New public demand slowed materially at the start of 2026, increasing just 0.1%qtr in Q1 following gains of 0.9%qtr in Q4 and 1.2%qtr in Q3. The weakness was driven by public consumption, which fell –0.2%qtr as the Energy Bill Relief Funded ended on 31 December 2025.
Public consumption declined –0.2%qtr, a marked departure from the 0.9%qtr growth recorded in each of the previous two quarters. State and local government consumption was the primary drag, falling –0.8%qtr in Q1. Federal government consumption continued to expand, albeit at a more moderate pace, rising 0.5%qtr in Q1. The expiry of the Federal Government’s Energy Bill Relief Fund at the end of 2025 would have had a material impact on today’s numbers. Indeed, abstracting from the effects of electricity rebate roll off, we estimate total public consumption would have increased by 0.3%qtr – still slow compared to the 1.0%qtr quarterly average growth rate recorded over the past two years.
New public investment continued to trend solidly, increasing 1.1%qtr. Strength in national defence investment was particularly pronounced, rising 6.8%qtr following a 7.5%qtr gain in the previous quarter. While total general government investment remained firm (1.8%qtr), investment by public corporations declined (–1.2%), reflecting falls across both the Commonwealth and state and local governments. As several large transport projects on the East Coast near completion, public investment growth is likely to moderate, although ongoing strength in defence investment should provide some support to the headline.
External Sector
Balance of Payments data confirmed our expectation that net trade was one of key detractors from GDP growth in Q1, driven by weaker commodity outflows, falling education services exports, and a surge in capital goods imports related to data-centre investment. However, the drag of –0.8ppt was somewhat larger than anticipated, comparing with our estimate of –0.6ppt and the consensus forecast of –0.5ppt. Goods and services trade flows appear to have contributed to the negative outcome in close to equal shares.
On the exports side, volumes declined by 1.1%qtr. Goods exports fell 0.8%qtr, largely reflecting weaker shipments of major commodities, which declined 1.7%qtr, the weakest outcome in two and a half years. Severe weather events disrupted mining activity and trade in iron ore and coal – the two largest export items – resulting in declines of 1.3%qtr and 6.8%qtr respectively. Gold exports, which are typically volatile, increased by 11.6%qtr. Excluding this component, goods exports would have declined by a larger 1.7%qtr.
Services exports fell 2.1%qtr, the largest decline since the height of the pandemic. Education exports (spending by foreign students in Australia), which account for more than one-third of total services exports, were the main driver. While education exports more than doubled in the eleven years to Q2 2025, they have trended lower since then, tracking a decline in student visa holders.
On the imports side, ADP equipment imports were a clear standout, nearly doubling in real terms over the quarter (an increase of 85%qtr), and driving a marked 6.3%qtr increase in capital goods imports. These data match the signal from the private CAPEX release last week, which show data-centre investment has lifted business spending growth to rates not seen since the height of the mining boom in 2012. Elsewhere, the global energy shock saw fuel imports rise by 12.5%qtr in nominal terms; however, this increase was fully explained by price changes, with little to no change in volumes. Consumption goods import volumes declined by 0.8%qtr, pointing to downside risks for consumer spending in the quarter. Services imports increased by 3.8%qtr, driven by higher transport, travel and other services.
In nominal terms, the current account deficit widened by more than $4bn to $27.1bn, a new record high. As a share of GDP, most likely it will rise to around 3.5%, which we have not seen since late 2017. This deterioration was almost entirely due to a smaller goods trade surplus. The primary income deficit also increased, reflecting larger outflows associated with foreign ownership of Australian assets – to a significant extent, mining company profits flowing to foreign shareholders.
Inventories
Inventories within the non-farm business sector increased 0.5% in Q1 following a modest 0.1% decline in Q4. The result was much firmer than our forecast and the market consensus, which was looking for a broadly flat outcome.
The main driver behind the upside surprise was a significant build-up in inventories within the mining sector, up 5.8%. This reflects a slowing in key commodity exports during the quarter as discussed above, with iron ore and coal disrupted by cyclones Koji and Mitchell. Elsewhere across the non-mining sector, inventories fell 0.3%. Those in more ‘consumer-facing’ industries managed to lift only slightly (+0.1%), potentially reflecting softer consumer demand (see below).
As discussed above, non-farm business inventories will add around +0.2ppts to Q1 GDP. At the same time, public inventories will detract around 0.3ppts. Together, the net impact of total non-farm inventories is a +0.1ppt contribution to Q1 GDP – broadly as we had expected in our preview, with the component makeup differing.
Sales
Sales volumes rose 0.2% in Q1. This is a material step down from the 0.6-0.7% quarterly pace that held from Q2 to Q4 last year. However, with an even weaker lift cycling out of the annual calculation from Q1 2025, the annual pace bumped up to 2.3%yr.
The largest gains stemmed from more business-facing industries like financial and insurance services (+2.5%), construction (+2.2%) and professional, scientific and technical services (+1.5%). This managed to offset a large decline from the mining sector (–3.1%), again attributable to weather-related disruptions for key commodity exports. Sales across consumer-facing industries were also softer, including retail trade (–0.2%), accommodation and food services (–0.6%) and arts and recreation (–0.2%). This suggests that the underlying health of the consumer was already soft in Q1, before the full impact of the Middle East conflict has materialised.
This provides us with a very general guide as to what we might expect for private demand, with today’s update suggesting it started the year on a softer footing. However, we caution that this is by no means an accurate indicator for private demand on a quarter-to-quarter basis given this survey’s lack of coverage of sectors that have being growing more strongly (e.g. health care and education), nor is it a direct input into the expenditure estimates for the National Accounts.
Company Profits
Company profits also surprised to the downside, falling 1.3% in the quarter, a weaker result versus our forecast and the consensus view for a small increase.
Once again, the chief culprit was the mining sector, where profits fell by 9.1%. Some of this is explained by lower iron ore prices and the impacts of cyclones on exports. However, part of this also reflects a normalisation from last quarter – quarterly profits have held in the $47-48bn range since early last year, bounced to just under $53bn in Q4, before returning to $48bn in Q1.
Profits in the non-mining sector was more constructive, up 3.7% (6.1%yr) and broad-based across many sectors, including construction, wholesale trade, manufacturing and information media and telecommunications.
Recall that being an accounting survey, this data incorporates changes in the prices of inventories – called the inventory valuation adjustment (IVA) – into the profit measure, but in an economic sense, IVA does not represent a true change in profitability. This has been a more prominent issue in recent times with significant quarter-to-quarter shifts in the IVA driving large swings in accounting profit measures in this survey.
Today’s data revealed that the IVA added $2.4bn to total profits in Q1, compared to adding $2.3bn in Q4. After adjusting for this, we calculate that the fall in gross operating surplus as measured in the national accounts is closer to –1.5%. The ABS also employs slightly different seasonal factors between gross operating profits in this data and official measures of gross operating surplus in the National Accounts.
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