Economy grows 0.4% but slowdown unlikely to prevent another RBA rate rise

Australia’s economy grew 0.4% in the June quarter, but CommBank economists say signs of slower growth are unlikely to be enough to prevent another interest rate rise.

Gross domestic product was 2.1% higher than in the June quarter of 2025, according to new figures from the Australian Bureau of Statistics. 

CommBank Head of Australian Economics Belinda Allen said the economy remained largely resilient but was losing momentum.

“The Australian economy is slowing modestly and underneath the hood the drivers of growth are switching,” Allen said in a research note following the release.  

But she said the slowdown would not be enough to prevent another rate increase given recent inflation data.

“This will not be enough to stop another interest rate hike from the RBA in November given recent inflation data indicating upside risks have materialised,” Allen said. 

CommBank continues to expect the Reserve Bank of Australia to raise the cash rate in November, while Allen said there remained a risk of an earlier move in September. Upcoming labour force data will be the final key release ahead of that meeting. 

How much is growth is slowing?

The 0.4% quarterly increase led to annual GDP growth slowing from 2.6% at the end of 2025 to 2.1%, which CommBank estimates is around Australia’s potential growth rate.

CommBank expects annual growth to moderate further to around 1.5% by the end of 2026 as higher interest rates continue to work through the economy. 

“We continue to expect the Australian economy to slow from here given three interest rate hikes to date and one more to come,” Allen said.  

The ABS described growth during the June quarter as subdued.

“Economic growth remained subdued in the June quarter as households continued to behave cautiously,” ABS head of National Accounts Grace Kim said. 

How are growth drivers changing?

Allen said the mix of activity underneath the headline GDP result was shifting. 

Household consumption rose 0.4% during the quarter, with much of that growth coming from a surge in electric vehicle purchases. Vehicle purchases jumped 10.3%, according to the ABS. 

At the same time, public demand is slowing, business investment dipped after strong data centre spending in the March quarter, and dwelling investment provided more support than CommBank had expected. 

Private business investment fell 0.5%, although it remained 10.4% higher than a year earlier. Investment in machinery and equipment for data centre fit-outs declined after a substantial rise in the previous quarter, while the ABS said overall data centre investment remained elevated. 

Dwelling investment rose 1.6% during the quarter, while investment in other buildings and structures increased 4.1%, driven by data centres, renewable energy and mining investment.  

Public demand added only a small amount to growth and was 2.1% higher over the year, well below average annual growth of around 4% between 2022 and 2025. 

Households still have some buffers

Household consumption rose 0.4%, although the ABS said spending remained subdued across most categories.

“The rise in electric vehicle purchases may have reflected households taking a longer-term approach to cost-of-living pressures, with some choosing EVs to help reduce ongoing expenses,” the ABS’ Kim said.  

Household incomes also continued to grow. Compensation of employees rose 1.5%, while household disposable income increased 1.1%, according to CommBank’s analysis. 

The household saving ratio edged up from 6.4% to 6.5%. Using their savings, “households still can smooth household consumption over coming quarters”, Allen said. 

But CommBank expects falling home prices and slower income growth to weigh on spending during the second half of the year.

Middle East conflict changes spending 

The Middle East conflict also affected the way Australians spent during the quarter.

Fuel consumption fell in response to elevated prices, while Australians cut back on domestic and international travel. Imports of services fell 4.9%. 

“The number of Australians travelling overseas for the northern hemisphere summer fell for the first time since the COVID-19 pandemic, significantly reducing international travel expenditure,” Kim said. 

Allen said that meant more household spending remained within Australia. 

“As a result more household spending occurred in Australia, adding to domestic capacity constraints and the inflationary pressures,” she said. 

Exports increased 0.8%, led by coal after weather-related disruptions in the March quarter. Overall, net trade added 0.1 percentage points to quarterly GDP growth. 

Inflation pressure remains

The National Accounts also contained signs of continued price pressure. 

Unit labour costs rose 1.2% in the quarter, taking annual growth to 3.6% which is an indication that businesses are still facing high labour costs in part due to weak productivity growth.. CommBank said productivity recorded no growth during the quarter and was 0.2% lower over the year.

GDP per capita was flat in the June quarter and 0.7% higher over the year.

For CommBank, the combination of slower growth but continued inflation pressure is the foundation of its base case for another rate rise before Christmas.

Household spending is expected to weaken, dwelling investment should moderate and public demand is slowing, but data centre investment is expected to continue supporting activity. 

CommBank nevertheless expects the RBA to raise rates in November, with the possibility of a September move still in play.