Australia's economic growth slowed in the March quarter of 2026, as cost-of-living pressures, surging oil prices, and reduced government spending combined to deliver a lacklustre performance. According to fresh figures from the Australian Bureau of Statistics, the national economy expanded by just 0.3 per cent over the three months to March, bringing annual growth to 2.5 per cent. This marks a decline from the 2.6 per cent growth recorded at the end of 2025.
Economy at a Crawl
KPMG chief economist Brendan Rynne described the economy as having slowed to a crawl, with no growth in sight. He noted that Australia had previously benefited from strong global demand for its commodities, but current conditions are less favourable. "Unfortunately, however, we aren't in the same position today, with Australia, like most non-major oil producing countries, experiencing a negative terms of trade shock due to the ongoing Middle East conflict," Mr Rynne said.
Stagflation Concerns
Investment Fund VanEck's head of investment and capital markets, Russel Chesler, warned that slowing growth could lead to stagflation. "Australia could now well be entering a stagflation regime of low growth and high inflation," Mr Chesler said. He pointed to rising unemployment and surging inflation, and noted that the Fair Work Commission's recent decision to lift the minimum wage by 6 per cent and award rates by 4.75 per cent would keep inflation high.
Stagflation is considered one of the worst outcomes for an economy, as it combines high costs, rising unemployment, and little to no growth. The economy's slowdown was largely driven by its first net trade deficit since 2017, with rising oil costs and investment in data centres subtracting 0.8 percentage points from gross domestic product (GDP).
Government Spending Falls
Government spending fell by 0.2 per cent in the March quarter, its lowest quarterly growth rate since September 2022. Commonwealth spending slowed due to a reduction in defence expenditure, while state and local government spending dropped by 0.8 per cent following the end of electricity rebates. Household consumption also weakened, rising by just 0.5 per cent over the quarter, largely due to a 0.8 per cent increase in essential goods spending.
Business Investment Booms
Business investment provided a bright spot, rising by 6 per cent over the quarter. This was driven by investments in data centres in New South Wales and Victoria, with machinery and equipment spending surging by 16.3 per cent, the biggest jump in three decades.
Productivity Falls
Treasurer Jim Chalmers faced questions about Australia's slowing productivity, which fell by 0.6 per cent over the March quarter. This means Australians are working more hours but producing less. Mr Chalmers sidestepped the criticism, highlighting a boom in private investment. "In time by seeing these investment figures flow through into our economy that will be an important part of shifting what has been a couple of decades now of poor performances on productivity," he said.
Interest Rate Hike Still Possible
Deloitte Access Economics partner Stephen Smith said the results were "uncomfortable" but unlikely to prevent further interest rate hikes. "The economy is cooling, but not in a way that suggests inflation will fall neatly back to target," he said. "A fourth rate hike in 2026 is still on the table." Mr Smith noted that while the economy expanded, it is "fading," with the headline result buoyed by a surge in business investment related to data centres, which is not broad-based and has modest employment implications.
Households Cautious
Households remained cautious, with essential spending dominating discretionary purchases. The end of federal electricity subsidies saw spending on energy rise almost 12 per cent, while the savings rate fell as consumers absorbed ongoing pressure on family budgets. ABS head of national accounts Grace Kim described the result as modest growth, noting that rising interest rates and higher fuel costs likely created an environment for more cautious consumer behaviour.
Treasurer's Optimism
Despite the slowdown, Treasurer Jim Chalmers pointed out that the annual pace of economic growth was the equal fastest in almost three years. "This is very solid in the circumstances," he said. "The biggest takeaway of today's National Accounts is that all of the growth in the March quarter came from the private sector." He added that the Australian economy is outperforming almost every major advanced economy and is above the OECD average in terms of annual growth.
Forecasts Align
Prior to the announcement, Commonwealth Bank had downgraded its GDP outlook to 0.0 per cent for the March quarter, while National Australia Bank and Westpac both predicted growth of 0.3 per cent. Commonwealth Bank head of Australian economics Belinda Allen said the private sector held up well over the first three months of the year, reiterating that the economy was in a decent position leading into additional headwinds.
