Updated ,first published
A growing economy. A lift in living standards. Business investment at its highest level since the mining boom. Productivity improving. People confident enough to go to Lady Gaga and the Ashes.
That’s the broad picture of how the national economy finished 2025.
But it may be as good as it gets, with clear signs that the domestic and global economic situation will deteriorate.
According to the Australian Bureau of Statistics, the economy expanded by 0.8 per cent through the final three months of last year. Annual growth lifted to 2.6 per cent, its strongest result in almost three years.
As Anthony Albanese was quick to note, the Australian economy grew quicker and kept unemployment lower than the world’s seven largest developed nations.
Consumer spending rose by a less-than-expected 0.3 per cent. But that subdued result was largely due to a drop in expenditure on electricity and gas, caused by government subsidies.
Discretionary spending – on those concert tickets to Lady Gaga or first day of the Boxing Day test – increased for the first time in more than a year. But at the same time, the household savings ratio grew to its highest level since mid-2022.
In other words, we spent a little bit more on what makes life interesting while also putting away cash for a rainy day.
Private investment lifted for a fifth consecutive quarter, with businesses continuing to increase spending in areas such as data centres and on aircraft. Annual spending on building new homes is now at its highest level since 2018.
Productivity was flat in the quarter, but over the past year rose by a full percentage point. It was even stronger in the private economy. Real unit labour costs edged down by 0.6 per cent in the quarter to be 0.1 per cent lower over the past year.
As Moody’s Analytics head of Australian economics Sunny Nguyen noted, the quarterly result was the cleanest representation of the economy in years.
“Growth came in above consensus, the composition was broadly balanced, and a number of the fault lines that defined the prior two years – weak per capita output, soft discretionary spending, uneven industry performance – showed genuine improvement,” she said.
Even financial markets, which acted irrationally on Tuesday after Michele Bullock noted the Reserve Bank’s March meeting was “live” as if board members would sit around for two days doing nothing, found a silver lining in the numbers.
Before the numbers, a rate hike this month was put at a 30 per cent chance. By day’s end, that was down to 13 per cent.
But, and there are some big buts, about these numbers.
For instance, per capita GDP – a reasonable proxy for living standards – improved, yet Australians are still a long way short of where they were when the Albanese government was elected.
In 2022, GDP per person was more than $100,000. Through 2025, and despite an improvement through the year, it’s at $99,261.
Public spending as a share of the economy, and of economic growth, is still too high.
Government expenditure, both on day-to-day services and on infrastructure, grew by the same amount as the private sector.
Treasurer Jim Chalmers was quick to argue the federal government’s share of this was due to a lift in defence spending. Over the past 12 months, the defence share of federal spending has climbed from 16.7 per cent to 17.4 per cent.
But spending, especially among the states, is also growing on everyday services including health, education and policing.
The numbers also confirm the heavy tax burden being borne by all Australians. Individuals paid a record $97.9 billion in income taxes in the December quarter, a 10.4 per cent increase over the past 12 months.
These numbers predate two important economic changes. The first was delivered in February when the Reserve Bank lifted the cash rate by a quarter percentage point.
If there’s no sharp improvement in inflation between now and early May, the RBA will whack home owners and business operators with another interest rate hike.
That will slow the economy.
The other big issue is the one playing out in the Middle East.
As Treasurer Jim Chalmers noted, the “economic consequences are uncertain but likely to be substantial”.
A spike in prices for everything from oil to fertiliser would feed through to higher inflation. That could force the RBA to lift interest rates even higher, crunching the economy’s gears.
Chalmers himself has a major role in how the economy will perform. He knows he has to cut spending in the May 12 budget.
Necessarily, deep fiscal surgery would slow the economy. But that short-term pain would deliver long-term economic gains.
So the December quarter of 2025 may be as good as it gets for some time.
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Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.