Private sector growth in Australia is recovering more slowly than expected six months ago, according to NAB Group Chief Economist Sally Auld.
While the broader economy remains resilient, recent data from the March national accounts and early Q2 indicators point to softer trends in household spending and business investment.
“The key domestic data over the past month show that private sector growth may be recovering more slowly than expected 6 months ago,” Auld said.
“The Q1 national accounts pointed to some loss in momentum in household consumption growth and an ongoing softer trend in business investment growth relative to the strong outcomes over recent years.”
NAB now forecasts GDP growth of 1.7% in 2025 and 2.25% in 2026, reflecting a gradual recovery in household spending, a continued lift in dwelling investment, and more consistent business investment.
By comparison, ANZ has trimmed its outlook to 2% growth in 2025 and 2.2% in 2026, citing global and domestic uncertainty. Westpac now expects Australia’s GDP growth to reach 1.7% year-on-year by the end of 2025, a modest downgrade from prior forecasts amid lingering global uncertainties and a cautious domestic transition. Together, the major banks anticipate below-trend growth across 2025–26, sending a consistent message of a measured recovery with constrained private-sector activity.
Household consumption in Q1 2025 rose by just 0.4% q/q, slowing from 0.7% in Q4. However, underlying consumption was just 0.2% once temporary energy subsidy impacts were excluded.
“Q1 consumption growth slowed in underlying terms and highlights the risk that growth may pick up more slowly than expected earlier in the year,” Auld said.
According to NAB, consumption per capita declined again, and although real disposable incomes rose due to temporary payments (including post-cyclone supports), the level remains below the 2015–2019 trend.
“Real disposable income growth rose in the quarter, though this was boosted by temporary income supports… which will unwind in coming quarters,” Auld said.
Spending remained soft in early Q2. Warmer-than-usual weather affected clothing and department store sales in April, but NAB data suggests some rebound in May.
“NAB consumer spending data points to some evidence of this with a rebound in clothing sales and department stores with overall spending rising 1.2% mom in May vs 0.2% in April,” Auld said.
The labour market remains in relatively good shape, with employment growing 0.4% q/q and 2.4% y/y in Q1. Market-sector jobs saw notable gains, and main jobs offset declines in secondary employment.
“The labour market remains in healthy balance,” Auld said.
Still, she warned that employment risks are skewed to the downside due to profitability pressures and subdued demand.
“Looking ahead, we think the risks to the labour market are more skewed to the downside given continued profitability pressures faced by businesses and a weaker demand backdrop,” Auld said.
NAB’s business surveys indicate sub-trend activity and weakening margins. Trading conditions are below average, and profitability has turned negative amid cost pressures.
“Business conditions continued to track below average in May with the employment sub-component softening,” Auld said. “The profitability component has tracked into negative territory reflecting ongoing input and labour cost pressures and less ability to push up output prices.”
Capex expectations for FY2025 are softening. Machinery investment fell 1.4% in Q1, though building investment rose 1.7%.
“Investment intentions now [are] a little below average,” Auld said. “The ABS Capex release… now points to a flat outcome for business investment over the next financial year.”
Q1 exports were disrupted by weather and a dip in education-related services. However, commodity exports are expected to rebound in Q2, and terms of trade remain high, supported by iron ore and energy prices.
“Trade subtracted from growth in Q1 but will likely rebound in Q2,” Auld said.
“We see a broadly neutral impact from trade on growth over the next 18 months with the volatility over recent years fading.”
Housing market activity remains resilient. The Cotality index showed 0.5% m/m growth in capital city prices in May, while annual growth slowed to 2.6%. Rents have stabilised at low monthly growth rates, with May’s 2.7% annual rent increase the slowest in over four years.
“House price growth has been solid recently, while growth rates across the capital cities continue to converge,” Auld said.
“The Cotality hedonic rents growth indicator has stabilised at around 0.3% mom this year… The annual growth rate in May was 2.7%, the lowest in over four years.”
Dwelling investment rose 2.6% q/q in Q1, but recent building approvals data points to a potential peak.
“These data can be volatile, but the recent data tentatively suggests that the improvement in approvals over the last year or so may have run its course,” Auld said.
While CPI inflation has moderated, housing-related price pressures are returning. New dwelling prices rose 0.5% m/m in April, reversing a three-month decline. NAB has revised its Q2 trimmed mean forecast slightly higher.
“New dwelling purchase price growth picked up in April, and will be important to track in May,” Auld said.
“We have nudged higher our preliminary Q2 trimmed mean forecast to 0.7% qoq from 0.6% qoq.”
Overall, NAB still expects inflation to settle around the RBA’s 2.5% target by late 2025, but housing costs and global risks remain watchpoints.
NAB continues to expect the RBA will cut rates three times in 2025, taking the cash rate to 3.1%.
“We continue to expect three further 25bp cuts in 2025 taking the cash rate back to a broadly neutral rate of 3.1%,” Auld said.
The RBA Board Minutes indicated that a 50bp cut was even considered in May, with global risks and subdued consumption cited as justifications.
“Members noted that a reduction in the cash rate could be warranted on the basis of either domestic or global factors,” Auld said.
However, the central bank remains cautious, particularly given labour market tightness and weak productivity growth.
“It was not yet time to move monetary policy to an expansionary stance,” Auld said.
