The Tussles

• For some time, we have been pointing to the need for private sector demand growth to pick up and offset an expected fade in growth in public demand. Recent data confirm that this is taking place, with consumer spending now gaining more momentum while the decline in public investment has become more apparent. This is not a consumer boom but rather a long-awaited recovery from an extraordinarily extended period of weakness.

• While we may still see a 'shaky handover' from public to private demand drivers, the risks around the domestic outlook are now more two-sided. As always with a tussle between two forces working in opposite directions, though, the net outcome can be noisy and the underlying trend will not always be straightforward to read.

• The labour market outlook reflects another tussle between opposing forces. While overall output growth is expected to increase further from here, activity will be less job-rich as growth in the labour intensive 'care economy' normalises and the expansion becomes centred on a less labour-intensive market sector. At the same time, labour supply is likely to trend up given the demographic forces pushing up participation. The outcome of this tussle will matter for the evolution of labour market slack.

This week's June quarter national accounts release marked a notable step along the path of Australia's evolving growth narrative. It showed the economy expanding a solid 0.6% in the June quarter 2025, lifting annual growth to 1.8%yr, returning to positive in per capita for the first time since 2023.

The headline result was slightly better than expected but the detail contained a more material upside surprise on consumer spending: a 0.9%qtr rise lifting growth to 2%yr. While some of this appears to be due to one-offs, underlying momentum looks firmer, consistent with rising growth in household disposable incomes and improving consumer sentiment. The consumer-led recovery that began in mid-2024 had seemed to lose its way a little in the first half of 2025 but now looks to be more firmly back on track.

Spending growth is still not strong per se. What we are seeing is a long-awaited recovery from an extraordinarily long period of weakness. The seven consecutive quarterly declines in per capita spending in 2023 and 2024 is the longest sequence of declines since quarterly estimates became available in 1960. The peak-to-trough fall is also larger than that seen during the early-1990s recession and not far off the decline seen during the GFC, albeit spread over two years rather than one. Even with a recovery and a solid June quarter result, per capita spending has only clawed back about 40% of the decline.

And, as mentioned, there were some temporary factors in the mix in the June quarter. The ABS highlighted the close timing of Easter and ANZAC Day public holidays in 2025, which appears to have encouraged longer breaks, giving a bigger than usual boost to discretionary services spend (where most of the upside surprise came from). There may also have been a bigger than usual response to End of Financial Year sales - our Westpac-DataX Card Tracker suggests this has been followed by a much quieter July-August with the pattern of shoppers more actively targeting sales windows something we have been seeing over most of the last two years. There may also be some other one-off factors at play - e.g. insurance-funded replacement spending and delayed activity relating to disruptions from Cyclone Alfred in March.

The full extent of these influences will only become apparent once the September quarter data rolls in. If they do prove to be large, we could well see some combination of a softer September quarter spend and downward revisions to the June quarter.

But even allowing for some likely one-off boosts, the June quarter update suggests the consumer recovery is on a firmer footing. For the first time in a while, risks to the consumer are 'two-sided' rather tilted to the downside.

Outside of the consumer, the update was less comforting. New business investment declined in the quarter with capex intentions suggesting the softness will continue. Meanwhile public demand is showing a clearer slowdown centred on a turn in public investment which has now fallen nearly 7% over the past three quarters. While the consumer is looking better, the wider mix still points to residual risks of 'shaky handover' as growth moves from public to private demand drivers.

The implications for labour demand are more nuanced. While the balance of these forces is expected to see GDP growth continue to pick up from here, the composition of growth will become less 'job rich' as it becomes more centred on the market-sector. The 'care economy' has expanded considerably over recent years, as we have noted on previous occasions. This is a labour-intensive part of the economy, which is why employment growth has been able to remain robust and the labour market tight, even though overall economic growth has been lacklustre over the past two years.

Older, more female workforce as participation rises

We should not forget the supply side of the labour market equation either. As described in a note released today with my colleague Ryan Wells, there is also a tussle between labour demand (wherever it ends up) and the ongoing uptrend in labour supply coming from rising participation rates. The latter has been an underappreciated feature even though it apparent in multiple countries for at least a quarter-century. This is because most people assume that as population ageing sees a higher proportion of people of retirement age this leads to a shrinking workforce relative to the adult population.

It turns out that population ageing happens because people are living longer, healthier lives and having smaller families. This means that fewer people are retiring early due to ill health and disability. It also means that many people end up working beyond conventional retirement ages in order to fund what would otherwise be a very long, expensive retirement. Meanwhile, smaller families mean people on average are spending less time out of the workforce. Labour participation of women, and of older workers of both sexes, therefore rises.

For many countries, including Australia and most other advanced economies other than the US, the net effect has been that overall participation has risen not fallen. There are probably limits to this effect, which high 'within-age-group' participation countries like Japan and New Zealand are testing. But for Australia at least, it seems very likely that overall participation rates will remain on an upward trend for a while yet. This has probably been under-appreciated because it is counter-intuitive, and because it is not a phenomenon in the US, as the note with Ryan discusses.

The net of some softening growth in labour demand but still-rising labour supply could mean that labour market slack increases more than some forecasters are expecting. How this plays out for domestic inflation pressures remains to be seen, but it is one of the reasons we think that inflation could be lower in early 2026 than the RBA currently forecasts.