Q1 GDP First Impressions: Data centres to the rescue as cost pressures moderate

The National Accounts show that Australia’s economy expanded just 0.3% over Q1 2026 and 2.5% in year ended terms.

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As we fully expected, the Australian economy expanded just 0.3% over Q1 2026 and 2.5% in year‑ended terms – the softest quarterly growth rate since Q2 2024.
Across the detail, the big story in the quarter was investment in data centres. We estimate that the net effect of this investment, including spillover effects, drove all the growth this quarter and around 0.8ppts of GDP growth in year‑ended terms. Outside of this, investment and economic activity were weak, with the pick‑up in household consumption offset by a fall in public demand.
This shows that the economy was clearly slowing even before the conflict in the Middle East and interest rate hikes had really started to impact. The headwinds from these developments 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).
On the supply side, Q1 saw a 0.6%qtr fall in productivity but the cost impact was offset by softer wages growth. This meant annual growth in the economy’s labour cost base still manage to tick slightly lower from 3.3%yr in Q4 to 3.2%yr in Q1, back near pre‑pandemic rates.
The RBA may view softer growth as a ‘necessary evil’ to bring demand and supply back into balance. However, a sharper‑than‑expected slowdown worsens the trade‑offs for inflation control, especially in light of the upside risks to inflation from the rapid pass‑through of energy prices that is already evident.

The National Accounts show that Australia’s economy expanded just 0.3% over Q1 2026 and 2.5% in year‑ended terms – the softest quarterly growth rate since Q2 2024. The quarterly outcome was in line with Westpac Economics’ expectation and slightly below the 0.4%qtr expected by the market. This is a material step down from the 0.8%qtr recorded in Q4 2025, but consistent with Westpac‑Now, which suggested Australia’s cyclical upturn had come to an end well ahead of this quarter’s partial economic indicators.

Domestic demand (spending by consumers, businesses, and governments) grew a solid 1.0%qtr in Q1 and 3.5% in year‑ended terms. Investment in data centres is the big story this quarter. On the back of data centres, new business investment accelerated by a whopping 5.7%qtr and 10.6%yr – the strongest quarterly growth since Q3 2011, when the second wave of the mining investment boom was topping out.

Investment in machinery & equipment grew 14.7%qtr, the strongest rate since Q2 2002, when the government introduced temporary tax incentives in response to the GFC.

We estimate that the net effect of investment in data centres by the IT industry contributed around 0.5ppts to growth in Q1 GDP and around 0.8ppts in year‑ended terms. These estimates consider the high import intensity of data centre investment and the spillover impacts on related parts of the economy (including logistics and construction services – more information available here). Outside of data centres, investment was soft with new engineering construction falling –2.5%qtr.

Outside of data centres, new private business investment likely went backwards in year‑ended terms. This is consistent with other investment classes being more mixed, with new building investment increasing 2.7%qtr, while new engineering construction offset this, falling 2.5%qtr.

Looking at the private sector, new private demand grew a strong 1.3%qtr and 4.0% in year‑ended terms. However, outside of data centres, demand was softening even before the full impacts of the Middle East conflict, and the full impact of the RBA’s three rate hikes had fully worked through the economy. Excluding new business investment, new private demand grew a soft 0.4%qtr in Q1.

Household consumption picked up slightly in the quarter, growing 0.5%qtr vs a revised 0.4%qtr recorded in Q4 2025. However much of this reflects the impact of changes in electricity rebates with spending excluding electricity moderating quarter to quarter, running at its slowest pace since mid-2024 in Q1. The quarter showed minimal impact from sharply higher fuel prices. Going forward, we expect a much bigger squeeze from higher inflation, interest rates, and bracket creep with real disposable incomes, expected to contract significantly in Q2 2026.

Housing construction is moderating. Home building activity disappointed in Q1, with construction of new dwellings down (–0.8%qtr), offset by a pick‑up in renovations (+3.2%qtr). Dwelling construction has been something of a bright spot over the last year. However, this expansion looks to be moderating, as existing capacity constraints in the industry, combined with high input costs, weigh on activity. The cost issue is likely to become more pronounced as effects from the conflict in the Middle East flow through.

New public demand stalled at the start of 2026, holding flat in Q1 following gains of 0.9%qtr in Q4 and 1.3%qtr in Q3. The weakness was driven by public consumption, which fell 0.2%qtr as the Energy Bill Relief Fund ended on 31 December 2025. New public investment continued to trend solidly, increasing 0.9%qtr on the back of national defence investment, which grew 6.8%qtr.

Net exports and inventories were in line with expectations, with the more volatile components of GDP detracting around 0.8ppts from growth in Q1. Weaker commodity outflows and lower education services exports drove a 1.1%qtr fall in exports, while imports increased 2.1%qtr, as capital goods imports related to data centre investment surged.

Unit labour costs are moderating, good news for the RBA

Labour productivity declined over the quarter to be 0.3% higher in year‑ended terms. Digging a little deeper, we estimate that productivity in the market (ex‑mining) sector grew at around 0.9%yr in Q1 (estimates will be finalised after Friday’s Labour Accounts). Quarter‑to‑quarter moves in productivity figures are noisy, and we do not see this result as worrisome for the underlying trend.

Indeed, despite a weaker productivity print in the quarter, growth in the economy’s labour cost base still managed to tick slightly lower, from 3.3%yr to 3.2%yr, back near pre‑pandemic rates. We estimate that a pull‑back in non‑market unit labour costs – which have been running much higher than in the market sector – was the main driver this quarter.

Q1 GDP First Impressions: Data centres to the rescue as cost pressures moderate

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