So much has happened since late February when tensions in the Middle East escalated, lifting oil and urea prices. The RBA also delivered further rate hikes in March and May. But today’s national accounts data is backward looking, offering only a snapshot of the economy before those headwinds fully take hold. It points to slower growth and a clear shift in the drivers of that growth, now heavily concentrated in data centre investment.
Gross domestic product (GDP) grew by 0.3% in the March quarter, down from an upwardly revised 0.9% in the December quarter of last year. This marks the softest pace of growth in almost two years. In annual terms, economic growth held steady at 2.5%.
Business investment
Beneath the headline, growth is becoming increasingly narrow. Business investment and household consumption led activity, but the strength was highly concentrated. Private capital expenditure in the information, media and telecommunications sector surged an eye‑watering 96.1% in the quarter and 190.1% over the year, reflecting the scale of data-centre investment.
This surge flowed through to broader investment. Spending on machinery and equipment jumped 16.3% in the March quarter, the largest increase in nearly three decades. Overall, business investment rose by 6.0% in the quarter, the fastest pace since 2017, and is now 10.5% higher over the year, contributing 0.7 percentage points to growth.
Without the lift from data centre construction, the capital expenditure narrative would have looked far less compelling. Business confidence softened over the quarter, and part of the investment surge was driven by imports, which diluted its contribution to growth.
Set against this, share market signals were far less supportive. Despite the surge in investment, listed technology stocks on the ASX sold off sharply over the same period, pointing to some disconnect between capital deployment and investor confidence that the scale of spending is justified.
Household spending
Outside of investment, the other key contributor to growth was household consumption, although momentum was modest. Consumption rose by 0.3% in the quarter, with early signs emerging that higher interest rates are starting to weigh on households. Discretionary spending barely increased, rising by just 0.1%, while essential spending was more resilient, up 0.8%.
Part of the strength in the quarter was temporary. Electricity spending surged by nearly 12%, largely reflecting the expiry of electricity rebates, which lifted measured consumption.
Looking ahead, the underlying trend points to further softening. Household finances are coming under increasing pressure, with real per capita income falling by 0.7% in the quarter, reversing the previous quarter’s gain. Over the year, incomes are now only marginally higher. At the same time, the savings ratio declined from 7.0% to 6.2%, suggesting households are increasingly drawing on savings to sustain spending.
Other GDP movers
The external sector provided a clear offset to growth, subtracting 0.8 percentage points. Imports surged, particularly semiconductors and equipment required for data-centre construction, Meanwhile, mining exports weakened due to weather disruptions and softer iron ore demand.
Public demand also weighed on growth. Public consumption slipped by 0.2% in the quarter, as electricity rebates rolled off, and higher defence spending pushed public investment up 0.9% in the same time period.
Inflation pressures
On inflation, labour cost pressures eased at the margin. Nominal unit labour costs moderated from 3.3% to 3.2% in annual terms and are now well below the elevated rates seen in recent years. Real unit labour costs rose by just 0.5% over the year, also marking a clear step down from recent trends. The household consumption deflator increased by 3.1% over the year, remaining above the RBA’s target band but pointing to some easing in underlying price pressures.
That said, cost pressures have not fully dissipated. Consumption prices were lifted by higher fuel costs towards the end of the quarter, while construction costs continued to rise, reflecting ongoing constraints in labour and materials.
Outlook
Looking ahead, the balance of risks is shifting. Higher interest rates, softer confidence, rising energy costs and heightened uncertainty are expected to weigh more heavily on activity in coming quarters. We expect the pace of annual growth to slow to around 1.4% by year’s end, which would mark a significant step down from last year’s pace.
While there remains a risk of one further rate increase in the third quarter, the bar for additional tightening is now higher. A softening labour market, the limited pass through of higher fuel prices to broader inflation so far, and emerging signs of moderating activity all point to a more cautious policy outlook. A rate hike later this month remains off the table.
