Australia’s economy expanded 0.4% in the June quarter, taking annual growth to 2.1%, as subdued household spending and weaker private investment reinforced concerns about the durability of the recovery and kept the Reserve Bank of Australia (RBA)’s next interest rate move firmly in focus.
Annual growth slowed from 2.5% in the March quarter, while household consumption increased just 0.4% over the three months. Government spending rose 0.6%, while private investment contracted 0.5%.
The figures cover a period marked by another interest rate increase, major tax changes and continued geopolitical disruption stemming from the Iran conflict.
Rate hike debate intensifies
The slightly stronger-than-expected quarterly result has strengthened expectations that interest rates could remain higher for longer, although economists remain divided over whether the RBA will tighten policy again as soon as September.
BNY senior APAC market strategist Wee Khoon Chong said the figures pointed to resilient underlying activity despite slower headline growth.
“Australia’s Q2 GDP rose 0.4% q/q, while annual growth eased to 2.1% from 2.5% in Q1, underscoring a moderation in headline growth but not a material loss of momentum in underlying activity,” Chong said.
“The data point to resilient underlying activity, while still-sticky inflation keeps the prospect of further policy tightening alive, even if the RBA is likely to stay on hold in September pending clearer labor market signals.”
The Australian dollar strengthened following the release, while three-year Australian government bond yields rose around 10 basis points. Markets moved to fully price a 25-basis-point rate increase by November.
Attention now turns to the August labour market report after employment unexpectedly declined in July.
State Street Markets head of APAC macro strategy Dwyfor Evans said the result reduced concerns about an economic slowdown but did not warrant an immediate rate increase.
“A better-than-expected quarterly report reduces RBA fears around a real sector slowdown but is insufficient in our view to prompt imminent policy tightening,” Evans said.
State Street Investment Management APAC economist Krishna Bhimavarapu took a more hawkish view, saying the combination of consumption growth and persistent inflation meant there were “high chances of a September RBA hike” unless employment data weakened materially.
Household demand soft, productivity remains weak
GDP per capita was unchanged during the quarter after contracting 0.1% in the March quarter, leaving annual per-capita growth at 0.7%.
Productivity also remained a weak point.
GDP per hour worked was flat in the June quarter after falling 0.6% in the previous three months, leaving annual productivity growth at negative 0.2%.
The RBA has previously warned that stronger population growth is becoming an increasingly important contributor to headline economic expansion.
The central bank expects population growth to reach 1.4% in the December quarter, up from its previous forecast of 1.2%.
The RBA currently expects GDP growth of about 1.4% by the end of the year, while Treasury is forecasting growth of 1.75% for the 2027 financial year.
VanEck sees further rate rises
VanEck head of investments and capital markets Russel Chesler described the result as another quarter of subdued economic performance and argued the RBA could need to raise rates twice before year-end.
“Today’s GDP growth of 0.4 per cent for the second quarter of 2026 marks another quarter of anaemic growth, with annual GDP rising to 2.1 per cent,” Chesler said.
“With GDP coming in higher than expected, we don't think the RBA will have any other choice but to increase rates at its September meeting later this month.”
Chesler pointed to low unemployment, trimmed mean inflation of 3.6%, sticky services inflation and continued wage pressures.
“In our view the RBA may very well need to raise rates, not once but twice before the end of this year to tame inflation back to its 2 to 3 per cent target,” he said.
For equity investors, Chesler said companies offering growth at reasonable valuations could outperform, highlighting materials businesses including South32, Sandfire Resources and Evolution Mining, alongside selected small- and mid-cap stocks such as SRG Global and Bravura Solutions.
Chalmers points to economic resilience
Treasurer Jim Chalmers welcomed the figures, saying they demonstrated the “resilience of Australia’s economy in the face of global uncertainty and conflict”.
“While global circumstances are challenging and people are under pressure, we’ve got a lot going for us and we can see some of this reflected in today’s figures,” Chalmers said.
“We saw quarterly growth moderate in the majority of major advanced economies but it picked up slightly in Australia.”
The Treasurer acknowledged inflation and productivity remained significant challenges but pointed to dwelling investment and rising incomes as positive elements of the national accounts.
“We know that we have a long-standing productivity challenge in our economy, which is why it was such a big focus of the Budget and continues to be a substantial focus of our economic agenda,” he said.
What comes next
The August employment report is now likely to be the next major test for interest rate expectations.
A resilient labour market would strengthen the argument that inflationary pressures remain too persistent for the RBA to relax its stance, while another weak employment reading could support those economists expecting the central bank to remain on hold.
With economic growth running below trend, productivity contracting and inflation still elevated, the RBA faces an increasingly difficult balance between restraining prices and avoiding a sharper slowdown in domestic activity.