Data centres drive Q1, economy slows to 0.3%

GDPA quarter carried almost entirely by data centres

Australia’s economy expanded just 0.3%qtr in Q1 2026 and 2.5% in year-ended terms — the softest quarterly pace since Q2 2024 and a material step down from the 0.8%qtr recorded in Q4 2025. The outcome matched Westpac’s forecast and sat slightly below the 0.4%qtr consensus, consistent with earlier signs the cyclical upturn had already come to an end.

• Investment in data centres was the story of the quarter. New business investment accelerated 5.7%qtr and 10.6%yr, the strongest since Q3 2011, while machinery and equipment surged 14.7%qtr, the fastest since 2002. We estimate data-centre investment by the IT industry contributed around 0.5ppt to Q1 GDP and 0.8ppt in year-ended terms, after accounting for high import intensity and spillovers.
• Outside data centres, activity was weak. New engineering construction fell 2.5%qtr and private business investment likely went backwards in year-ended terms. Household consumption picked up slightly to 0.5%qtr, though much of this reflected electricity rebate changes, with underlying spending running at its slowest pace since mid-2024.
• New public demand stalled, holding flat as the Energy Bill Relief Fund ended on 31 December, while net exports and inventories detracted around 0.8ppt from growth as data-centre imports surged.
• On the supply side, productivity fell 0.6%qtr, but softer wages meant the economy’s labour cost base eased to 3.2%yr from 3.3%, back near pre-pandemic rates. The RBA may view softer growth as a necessary evil to rebalance demand and supply, but a sharper-than-expected slowdown worsens the trade-offs for inflation control.

Consumer ConfidenceConfidence largely unchanged

WagesAnnual Wage Review: FWC lifts minimum wage 4.75%

• The Fair Work Commission’s 2026 Annual Wage Review handed down a 4.75% increase in the minimum wage and all modern award rates, effective 1 July 2026 — larger than the 3.50% lift in 2025 and 3.75% in 2024, but smaller than the 5.75% awarded in 2023.
• The decision directly affects around 21.1% of the workforce paid at the applicable minimum or award rate, with the largest impact on award-reliant industries such as health care, retail, accommodation and food, and administration. Their share of the national wage bill is lower, at around 11.2%.
• Westpac had pencilled in 4.25%, so the outcome was only slightly above expectation. Back-of-the-envelope estimates suggest a direct impact of just +0.1ppt to the Q3 2026 WPI forecast, so it does not substantially add to the inflationary impulse.
• The indirect risk is harder to gauge. If the decision acts as a benchmark and EBA outcomes rise by 0.5ppt, that could add 0.2ppt to Q3 WPI growth. A gradually easing labour market and slowing economy should temper this risk, but the RBA will remain cognisant of it.

Foreign ExchangeAUD below 0.715 as risk sentiment sours

• The Australian dollar held below US$0.715, staying near a two-week low as renewed hostilities in the Middle East dampened risk sentiment, while upbeat domestic trade data offered some support.
• Australia’s trade position swung back into a surplus of AUD 1.79 billion in April, from a deficit of AUD 1.02 billion in March, driven by a rebound in iron ore and coal exports. Import growth nonetheless remained robust, underlining still-resilient demand for capital goods.
• Softer Q1 GDP readings reinforced signs that the Reserve Bank’s three rate hikes this year are cooling demand and helping contain price pressures, tempering expectations for further near-term moves.
• Fresh attacks in the Middle East and near the crucial Strait of Hormuz have kept energy prices elevated, fuelling renewed inflation concerns and complicating the outlook as the RBA weighs cooling demand against an imported price impulse.
• Markets have ruled out another rate hike this month but remain evenly split on the prospect of a move in August, leaving the Aussie sensitive to incoming data and global risk developments.

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Sources: Westpac Economics (25 May 2026), ABS (Q1 2026 National Accounts), Fair Work Commission, ANZ-Roy Morgan. This summary is for informational purposes only and should not be considered financial advice. Always consult a professional before making investment decisions.