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Australia’s economy delivered a stronger-than-expected performance in the second quarter of 2025, expanding at its fastest pace since September 2023. Fresh data from the Australian Bureau of Statistics (ABS) shows that Gross Domestic Product (GDP) rose 1.8% year over year, outperforming economist forecasts of 1.6% and outpacing the 1.3% growth recorded in the previous quarter.

On a quarterly basis, GDP climbed 0.6%, slightly ahead of the 0.5% predicted in a Reuters poll. This marked the third consecutive quarter of steady expansion, underlining the resilience of the Australian economy amid ongoing global challenges.

What’s Driving the Growth

The ABS report highlighted that the bulk of momentum came from domestic consumption, particularly in household and government spending. Private demand showed signs of revival as real household incomes improved, supported by a more accommodative financial environment.

Net trade also added to the economy’s strength, with rising exports of mining commodities—a sector that remains a cornerstone of Australia’s external growth. However, public demand was flat, as a 0.2 percentage point decline in public investment offset gains from government expenditure.

Policy Shifts and Central Bank Outlook

The stronger GDP figures arrived shortly after the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to 3.6% in August, aiming to stimulate growth while maintaining inflation stability.

In its accompanying statement, the RBA struck a cautiously optimistic tone, suggesting that global risks, particularly around U.S. tariffs and policy uncertainty in key trade partners, appear less severe than initially feared. Australia, which faced a baseline 10% tariff imposed by U.S. President Donald Trump, has so far managed to absorb the impact without significant disruption to trade.

Still, the central bank trimmed its 2025 growth forecast to 1.7% from 2.1%, citing weaker-than-expected public demand and subdued productivity improvements. The bank emphasized that the downgrade was driven more by structural productivity challenges than trade-related shocks.

Inflation and Confidence Trends

Australia’s inflation cooled to 2.1% in the second quarter, its lowest level since March 2021 and close to the RBA’s target range of 2–3%. The easing price pressures have provided breathing room for households and businesses, helping support spending activity.

At the same time, confidence indicators are showing signs of a meaningful turnaround. According to the Westpac-Melbourne Institute survey, consumer sentiment rose 5.7% to 98.5 in August, its highest level in over three years. While still shy of the 100 mark that signals net optimism, analysts argue the trend is encouraging.

“This long run of consumer pessimism may finally be coming to an end,” said Matthew Hassan, Head of Australian Macro-Forecasting at Westpac, pointing to improving real incomes and stabilizing financial conditions.

The Bigger Picture

Australia’s latest GDP reading underscores the economy’s resilience in the face of global volatility and trade frictions. With inflation under control, interest rates lower, and domestic demand strengthening, the near-term outlook appears relatively positive.

However, the challenges of sluggish productivity growth, fragile global demand, and the uncertainty of international trade policies remain potential headwinds. Whether Australia can sustain this growth momentum into 2025 will depend on how effectively policymakers and businesses navigate these evolving dynamics.