Q2 GDP First Impressions: Domestic demand softens as unit labour costs edge higher

The Australian economy expanded 0.4% in Q2 2026, with year-ended growth slowing to 2.1% from 2.5%yr in Q1.

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The Australian economy expanded 0.4% in Q2 2026, with year-ended growth slowing to 2.1%. The economy is losing momentum, with growth running at around 1.5% on a six-month annualised basis over the first half of 2026, down from around 2.8% in the second half of 2025.
Domestic demand slowed sharply as momentum faded across both the private and public sectors. Household consumption and residential construction continued to contribute to growth, while business investment fell following the data centre-related surge in Q1. At the same time, government spending is slowing as the infrastructure pipeline moves well past its peak.
The big surprise was a 0.6%qtr increase in real household disposable income over the quarter, much stronger than the fall of 0.3%qtr we had previously pencilled in and despite significant drags from higher interest rates and energy costs. The gain meant the household savings ratio showed a small lift rather than the decline that ordinarily occurs when households are cushioning against income shocks.
On the supply side, productivity was flat over Q2, with average earnings also rising slightly over the quarter, which helped to deliver an upside surprise to household purchasing power. As a result, annual growth in the economy's labour cost base ticked higher to 3.6%yr from 3.2%yr in Q1.
The Q2 Accounts provide a glimpse of what lies ahead. Interest rate-sensitive sectors, including household spending, along with public demand, will likely remain soft. Structural tailwinds from investment in AI infrastructure, renewable energy and the delivery of projects already in the construction pipeline will help offset this weakness.
Today's result suggests the economy is running a touch firmer than expected by the RBA (1.9%yr). This firmer outcome and a tick higher in unit labour costs will likely add to the Board’s unease leading into its September meeting.

The Australian economy expanded 0.4% in Q2 2026, with year-ended growth slowing to 2.1% from 2.5%yr in Q1. The outcome was a touch stronger than the 0.3%qtr expected by Westpac Economics and the market. Despite the slight upside surprise, the economy is losing momentum, with growth running at around 1.5% on a six-month annualised basis over the first half of 2026, down from around 2.8% in the second half of 2025.

Domestic demand (spending by consumers, businesses and governments) slowed sharply, rising just 0.3%qtr in Q2 and 3.1% over the year, as momentum faded across both the private and public sectors. This was the softest quarterly increase since the December quarter of 2023.

New private demand grew 0.3%qtr and 3.6%yr, supported by household consumption and dwelling investment, which offset declines in business investment and housing ownership transfer costs associated with softer housing turnover.

Consumer spending rose 0.4%qtr and 1.8%yr, in line with our expectations. The big surprise was a 0.6%qtr increase in real disposable income over the quarter, much stronger than the fall of 0.3%qtr we had previously pencilled in. This saw the household savings ratio lift higher, despite the higher spending.

We also saw households shelve some travel plans over the quarter, with tourism imports falling by $2.7bn amid the conflict in the Middle East. Some of this spending appears to have been redirected towards vehicle purchases, particularly EVs, with consumer imports of motor vehicles rising by a record $3.2bn over the quarter.

Housing construction increased 1.6%qtr and 5.8%yr, broadly in line with our forecast. Growth was driven by the construction of new dwellings, which rose 1.7%qtr, while renovation activity also grew 1.4%qtr. A substantial pipeline of work yet to be completed should continue to support residential construction activity in coming quarters.

New business investment slightly softer than expected, falling 0.5%qtr, although it remained a strong 10.5% higher in year-ended terms (compared with our forecast of -0.4%qtr and +10.1%yr). While machinery and equipment investment declined sharply (-5.6%qtr), strength elsewhere helped offset some of the weakness, particularly in non-residential building construction linked to data centres and engineering construction associated with renewable energy projects. Despite the quarterly decline in business investment, we estimate investment by the IT industry grew around 5.0%yr, contributing approximately 0.3ppts to year-ended GDP growth.

Housing ownership transfer costs, which encompass activity by real estate agents, as well as related legal, financial, accounting and removalist services, declined in line with softer housing turnover. The category has now fallen 6.0% over the first half of 2026.

Private demand will increasingly need to pick up the slack left by slowing public demand, growing just 0.2% and 1.9%yr, falling 0.6% in six-month annualised terms. As temporary rebates and cos of living support measures unwind, public consumption is moderating. At the same time, the infrastructure pipeline, particularly in NSW and Victoria, continues to roll over as major projects are completed. While investment in defence and other public assets is increasing, it remains lumpy and has not fully offset the decline in infrastructure spending.

Net exports and inventories were broadly in line with expectations, with the more volatile components of GDP making a neutral contribution to growth in Q2. Net exports contributed 0.1ppt to growth as consumers shelved their travel plans amid the ongoing conflict in the Middle East, offset by a 0.1ppt detraction from inventories as the mining sector ran down stockpiles that had been rebuilt in Q1.

Unit labour costs likely to leave the RBA Board uneasy

Labour productivity was flat over the quarter and 0.2% lower in year-ended terms. Digging a little deeper, we estimate that productivity in the market sector grew 0.2%qtr but declined 0.1%yr. The market sector excluding mining estimate will be finalised after Friday's Labour Accounts. Quarter-to-quarter movements in productivity are notoriously noisy, and we do not view this result as particularly concerning for the underlying trend.

With average earnings also rising slightly over the quarter, helping to deliver an upside surprise to household purchasing power, annual growth in the economy's labour cost base ticked higher to 3.6%yr from 3.2%yr in Q1. Unit labour costs increased across both the market and non-market sectors of the economy..

Q2 GDP First Impressions: Domestic demand softens as unit labour costs edge higher

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