Australia’s economy expanded faster than expected in the June 2025 quarter, up 0.6 per cent quarter-on-quarter and 1.8 per cent year-on-year. The composition matters more than the headline: household consumption rebounded and government spending remained firm, while public investment fell sharply. The Reserve Bank of Australia (RBA) kept rates on hold, citing persistent services inflation. Translation for business leaders: demand is holding up, but the funding and cost backdrop remains tight—invest with discipline and defend margins.

The numbers behind the beat: demand doing the heavy lifting

Australian Bureau of Statistics (ABS) data point to domestic demand as the main engine of growth. Household spending rose an estimated 0.9 per cent in the quarter, skewed to services categories such as travel and hospitality, consistent with industry reports of record bookings across airlines and hotels. Government consumption also increased, cushioning the economy even as public investment contracted.

Annual growth of 1.8 per cent marked the strongest pace since late 2023, yet the 2024–25 financial year printed a modest 1.3 per cent—one of the softest expansions of the past decade. As one bank economist put it, the rebound looks “fragile and unconvincing,” underscoring that cyclical momentum is narrow and uneven. Tom Lay, Head of National Accounts at the ABS, noted that domestic demand—especially household and government consumption—did most of the heavy lifting compared with investment.

RBA stance: tight for longer, services inflation in the crosshairs

The RBA held the cash rate steady, emphasising that services inflation remains above the 2–3 per cent target band and is proving sticky. The combination of resilient services demand, wage pressures and weak productivity growth keeps core inflation elevated and limits the scope for rate cuts. Expect a “higher-for-longer” profile rather than a swift easing cycle.

Strategically, businesses should plan for a baseline where finance costs, rental escalators and wage drift remain elevated into 2026. Pricing power will be decisive: firms with strong brands, differentiated service and the ability to yield-manage (airlines, accommodation, healthcare, software) can preserve margins; price-takers in traded goods face the squeeze.

Winners and worriers: sector lens

Retail and services: Consumer-facing services are outperforming. Airlines and hospitality report record bookings, reflecting a shift from goods to experiences. Retailers with exposure to travel-adjacent categories (luggage, premium apparel, payments) are benefitting. However, discretionary goods remain patchy as households trade down and hunt value.

Manufacturing and construction: The drag from public investment is biting. Project deferrals, procurement delays and cost overruns are stalling the pipeline. Manufacturers tied to building materials and capital goods report softer order books and compressed utilisation rates. The capex drought raises medium-term competitiveness risks, from capacity constraints to slower diffusion of new technologies.

Government suppliers: While investment is softer, operating expenditure in health, education and social services is steady, favouring service providers with long-term contracts, proven compliance and workforce scale. Margin discipline remains critical as indexation often lags wage growth.

Why the mix matters: the “barbell economy” and margins

Think of the current expansion as a barbell: on one end, services demand and government consumption; on the other, weak investment and patchy goods demand. That mix supports top-line revenue in services-heavy businesses but erodes medium-term productivity and supply-side capacity. Without a turn in business investment, unit labour costs will stay high, keeping pressure on prices and calling forth a longer RBA vigilance.

For CFOs, this argues for a rebalanced capital allocation framework: prioritise high-return, quick-payback digital and automation projects that lift productivity; defer speculative capacity expansions until financing costs ease or customer contracts deepen. Tight working capital discipline—inventory optimisation, faster receivables, negotiated supplier terms—will free cash without sacrificing growth optionality.

Competitive advantage: playbooks for early movers

• Yield and mix management: Service firms should sharpen dynamic pricing and capacity allocation. Airlines and venues already price to demand elasticity—apply similar tactics in healthcare, education and subscription software (tiering, add-ons, off-peak pricing).
• Productivity tech as an inflation hedge: Deploy AI-enabled workforce scheduling, process automation and self-service channels to offset wage drift. Target 150–300 bps labour productivity uplift within 12 months to preserve EBITDA margins.
• Loyalty and data: With demand concentrated in services, loyalty programmes that personalise offers can raise frequency and basket size. Payments and fintech partners can surface high-LTV cohorts and reduce churn.
• Procurement power: Consolidate vendors, forward-buy critical inputs and hedge key exposures (energy, FX) while volatility premiums remain manageable.

Policy and pipeline: what to watch

Fiscal settings are under scrutiny after the upside growth surprise. Arguments for broad stimulus weaken, while targeted measures for productivity—skills, digitisation, housing approvals, grid and transmission upgrades—would improve the supply side without reigniting inflation. The slump in public investment suggests execution risk rather than intent; clearing planning bottlenecks and standardising procurement (e.g., risk-sharing templates, indexation clarity) would unlock stalled projects and crowd in private capital.

Regulatory settings will shape outcomes: industrial relations rules affecting rostering and overtime, migration and skills policy, and environmental approvals timelines directly influence cost structures and delivery schedules. Companies embedded early in these dialogues can secure advantaged positions in procurement and workforce access.

Global context: a familiar pattern with local twists

Australia mirrors a broader post-pandemic pattern: consumption-led growth, services inflation stickiness, and cautious business investment. Where Australia differs is exposure to commodity cycles and housing supply constraints, both of which amplify price pressures. Executives with regional portfolios should expect similar demand skews in other developed markets, but with different rate paths and energy dynamics—plan pricing and capex on a market-by-market basis rather than a single global playbook.

Six-month outlook and scenarios

• Base case: Consumption holds up but cools as higher rates bite; services inflation eases slowly; the RBA stays on hold longer than markets would like. GDP moderates; margins hinge on productivity wins.
• Upside: Public investment execution improves in H1 2026, unlocking capex. This relieves supply bottlenecks and lifts non-mining investment; inflation falls faster, enabling gradual rate cuts.
• Downside: A sharper consumer pullback exposes overbuilt service capacity; sticky inflation forces another hike; debt-servicing costs squeeze SMEs, lifting insolvencies.

Action now: stress-test pricing and wage budgets at +50–100 bps inflation persistence; phase capex with milestone triggers; prioritise projects with sub-24-month payback; increase cash buffers to 3–6 months opex; and deepen customer analytics to defend share without racing to the bottom on price.

The headline beat is welcome. But without a turn in investment and productivity, growth will remain consumption-heavy and inflation-prone. The businesses that win from here won’t be the loudest spenders—they’ll be the sharpest allocators.