Public spending rebound lifts economic growth forecasts
Increased federal government spending will boost Australia’s economic growth to the highest level in almost a decade outside the pandemic.
Sharp growth in defense investment and spending by federal public companies contributed to a 0.9 per cent increase in public investment in the December quarter despite a sharp decline in public infrastructure work, Westpac economists said in a research note.
The strong recovery in public demand following a decline in the first half of 2025, with a 1.3 per cent increase in the September quarter, contradicts claims by Chancellor of the Exchequer Jim Chalmers that government spending is not driving inflation.
Westpac’s Pat Bustamante, Mantas Vanagas and Neha Sharma raised their December quarter GDP growth forecast to 1.1 per cent, alongside stronger-than-expected economic indicators such as higher public stock figures released in recent days.
If confirmed, national accounts figures due to be released by the Australian Bureau of Statistics on Wednesday would represent the country’s highest quarterly economic growth rate since December 2016, outside the COVID-19 period.
Defense investments rose 7.1 percent in the quarter, while investments by federal public companies rose 6.1 percent, offsetting lower investments from state and local governments.
Experts warn that the budget is better at measuring trends in government spending than public demand data.
However, after the RBA’s interest rate increase in February, Dr. Chalmers has consistently argued that the contribution of public demand to inflation is declining.
“Cost of living support measures have largely ended, but programs such as the NDIS can continue to support government spending in the future,” the Westpac trio said in the note.
They expect GDP growth to be 2.6 percent annually; This would be above the 2.3 percent forecast in the Central Bank’s Monetary Policy Statement in February.
Due to Australia’s weak productivity growth performance, the RBA predicts that GDP growth higher than around two per cent per annum will exceed the economy’s speed limit and cause inflation to rise.
Demand has exceeded the economy’s capacity, causing inflation to run hotter than the central bank is comfortable with, RBA governor Michele Bullock told the Australian Financial Review Business Summit on Tuesday.
“The supply potential of the economy appears to be slightly lower than previously assessed,” he said.
Commonwealth Bank economists raised their December quarter GDP forecast to one per cent from 0.7 per cent; this would be “well above” their potential estimates.
Moreover, conflicts in the Middle East have sparked fears of a dramatic rise in oil prices, which will further fuel the inflation fire.
“The RBA is already on edge by raising the cash rate in February,” CBA’s Ashwin Clarke, Harry Ottley and Belinda Allen wrote in a research note.
“A strong finish to 2025 does not change the outlook but does suggest that the RBA’s changes to its assessment of the output gap are justified.”
They said this supported their view that the RBA would need to raise interest rates further to bring the economy back into balance, raising the possibility that the board would take action as early as March 17.
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