Economic growth picks up
It has been said that the Aussie economy picked up some surprising strength in the second half of 2025, but that growth was heavily depending on big population growth and heavy government spending.
The national accounts for the December 2025 quarter did partly reflect that reality.
The estimated population appears to have taken a large jump of more than 100,000 in the December quarter - perhaps this will be revised lower.
Australia's economy grew up +0.8 per cent in the December quarter, seasonally adjusted, taking annual GDP growth up to +2.6 per cent...but with a timely lift in productivity.
Public demand increased again by +0.8 per cent over the quarter, and government consumption increased to a new peak of 23 per cent of GDP (h/t
Mark the Graph).
GDP per capita increased for the fourth quarter on the bounce, to be +0.9 per cent higher than a year ago, so it's good to see living standards on the rise again.
In current prices terms, nominal GDP hit a new high in late 2025.
Dwelling investment growth slowed from +2 per cent in Q3 to +0.6 per cent in Q4, but construction should remain solid in 2026 given the pipeline of housing underway.
Consumer spending was surprisingly a bit lacklustre and slowed in Q4, as households shored up their finances a little (this weaker figure was also partly due to electricity rebates).
At the household level, the saving ratio increased from 6.1 per cent to 6.9 per cent, which was the highest level since 2022.
The recent estimated increase in household savings rates has been in part down to lower mortgage interest payments, and this trend will reverse in 2026 as mortgage rates increase again.
Most borrowers in Australia are on variable rate mortgages, so the impact on consumers will be fairly immediate.
Finally, Australia's terms of trade are off their highs, but still remain at a historically elevated level.
The wrap
Overall, 2025 finished with the economy growing at a fair clip again, pushed along by a bigger government and high levels of government spending, both at the Federal and state level.
As for the outlook for 2026, Middle East tensions and conflicts have historically tended to dent business confidence.
Higher oil and petrol prices and the February rate hike will also serve to dampen consumer sentiment, while market pricing currently sees the cash rate target rising by 25 basis by May 2026, potentially going all the way back up to the cycle highs at 4.35 per cent by February 2027.
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