National accounts released this week confirm Australia is in a cyclical upswing that’s becoming more broadly based with the latest quarterly figures suggesting there’s more supply capacity than some analysts feared.
Westpac IQ reports during Q4 2025 solid growth was seen across a range of both public and private demand in Australia with business investment looking positive “even as the lumpy timing of buying in data centre equipment versus building the actual data centre induces volatility in the components”.
“While the external sector detracted from growth overall, minerals export volumes bounced after a long period of relative stability. Factor in higher commodity prices across many key exports and the income (and tax revenue) boost from this source is material,” Westpac Chief Economist Luci Ellis notes.
“This is an unambiguously good thing. Growth had been lacklustre for much of the post-pandemic period, even with the ramp-up in the care economy. And stronger dwelling investment means more housing supply. Overall, we see the composition of recent and near-term growth as being consistent with investing in Australia’s future.
“Supply capacity is better than many observers feared. As one of my old bosses used to say, most changes to your view come from revisions to history. His observation was especially pertinent in the Q4 accounts.
“While growth in the quarter lagged our final estimate, the previous three quarters were each revised up slightly. As well as meaning that our year-ended growth forecast was on the money, the material cumulative revision implies that the inflation seen recently occurred alongside stronger growth than previously understood.
“This inherently implies that supply capacity was higher and growing faster than previous data releases implied. We have long believed that Australia can grow sustainably faster than 2%; this week’s data is evidence in favour of our view and against the slow-trend hypothesis.”
Ellis notes that every quarter, the Australian Bureau of Statistics (ABS) runs the ruler over the country’s economy, which tells the story of the underlying activity pulse, now and in the past. Ellis says the story is usually a mixed bag of positive and negative news, and some results are simply perplexing.
“This quarter was no different,” the Chief Economist says.
That’s the good, now the bad
ABS data shows gross domestic product (GDP) rose 0.8% during the December quarter and by 2.6% since December 2024. Economic growth was observed across almost all industries, with private and public demand each contributing 0.3ppt to growth.
Changes in inventories contributed to growth, reflecting a rebuild in inventory stocks through production and imports. Net trade detracted from growth as the rise in imports outpaced exports. GDP per capita rose 0.4% this quarter and increased 0.9% since December 2024.
On a negative front, Ellis reports that the public sector continues expanding its share of the economy and while infrastructure spending has been rolling over as projects complete, other realms of public spending remain robust.
“The ‘handover’ from public to private spending was less complete than we initially thought. This becomes a particular issue if the spending calls on resources that the private sector is also competing for,” says Ellis.
“As we have previously highlighted, much of the private sector investment has been in ‘structural’ areas such as energy transition and data centres that are not simply responses to consumer demand and thus will be resilient to consumer weakness.
“They also lean heavily on construction capacity that public programs such as Housing Australia and the Brisbane Olympics also seek to draw on.”
Westpac’s Chief Economist notes that a large public sector is not inherently bad. Ellis says many of the spending initiatives, including on disability and social care, address important needs and create opportunities for the people helped.
However, separate to the national accounts, the hostilities in the Middle East have closed the Strait of Hormuz and damaged Qatari LNG production. This in turn has seen global oil prices spike and domestic petrol prices also rise significantly although Ellis says there is an export and tax revenue fillip for Australia from this that will cushion the cost shock.
Using Oxford Economics’ global model, Westpac IQ assesses the potential implications for growth and inflation of three different scenarios for the conflict.
The US–Israel attack on Iran over and Iranian response is disrupting shipping in the Persian Gulf and sending oil prices to surge. Westpac IQ says the broader economic impact remains highly uncertain, depending on how protracted the war is and whether there’s lasting damage to transport infrastructure.
Using the Oxford Economics model, Westpac IQ traces through different scenarios for their impacts on Australia and New Zealand, which sees the regions facing a rise of another US$25 per barrel to around US$100, and possibly see the price of Brent oil rise to US$185 per barrel should a disruption within the Strait of Hormuz drag on for three or more months.
Meanwhile, the Reserve Bank of Australia assumes inflation in Australia to remain relatively well anchored through the post-pandemic surge.
“Some of the miss was likely noise, relating to weather effects on actual electricity consumption and the mapping from total vehicle sales to sales to households”
Ellis suggests that while the RBA would be nervous – knowing that petrol prices are very salient for household beliefs about inflation – it should be keeping this risk in perspective and not act on a possibility that expectations might lift.
“The anticipated private sector recovery is underway, but it is more about investment than household consumption. The consumer will again be reined in by restrictive monetary policy and rising tax burdens until the current inflation pulse subsides,” the Chief Economist says.
“Higher oil prices represent a classic terms-of-trade deterioration for energy importers, while disruption in the Strait of Hormuz risks a volume shock to LNG supply,” says Louise Loo, Head of Asian Economics at Oxford Economics.
“Electricity systems, particularly in Northeast Asia, rely heavily on imported gas.”
Oxford Economics expects immediate inflation pass-through will be muted by fiscal shock absorbers, Loo adds.
“Subsidies, stabilisation funds, and state-owned refiners in economies such as India, Indonesia, Malaysia, and Thailand smooth retail prices. But they also shift the adjustment onto public balance sheets,” she says.
The larger risk stems from LNG logistics rather than oil prices, she added. Disruption to cargo flows – particularly from Qatar via the Strait of Hormuz – could force utilities to turn to the spot market, raising effective import prices and tightening electricity supply.
Westpac’s Chief Economist adds that comprehensive, interlinked data sets such as the national accounts will always throw up some puzzles. This time Westpac IQ was surprised that the consumption data was not stronger in Q4 2025.
“Some of the miss was likely noise, relating to weather effects on actual electricity consumption and the mapping from total vehicle sales to sales to households,” Ellis continues.
“But there is also a notable gap between our estimates of non-tourism spending offshore, such as online shopping, gaming and gambling, based on customer card spending, and the ABS’s estimates based on other sources. This is an area where the data revisions my old boss used to warn about might come into play at some point.”
Write to Adam Orlando at Mining.com.au
Images: ABS, Coal Australia & iStock
