Australia’s economy entered 2025 with subdued momentum. GDP rose just 0.21% over Q2, bringing annual growth to 1.34% – well below the long term average of 3.3%.

Household spending provided one of the few positives. Both essential and discretionary spending categories contributed to growth, suggesting real wage gains are starting to lift confidence.

In contrast, public investment pulled back, with major infrastructure projects in energy, transport, health, and education either concluding or facing delays, leading to a notable slowdown in government-led economic activity.

Inflation continues to ease

CPI rose 0.7% in Q2, down from a revised 0.9% in Q1. On an annual basis, inflation now sits at 2.1%, its lowest level since Q1 2021 and well within the RBA’s 2-3% target range.

While the trend is encouraging, risks remain. Global tariff tensions could reverse progress by pushing up input costs. If inflation flares again, the RBA may slow the pace of interest rate cuts. Conversely, if demand weakens, deflationary pressures could reemerge, prompting the RBA to accelerate easing.

Real wages and savings are improving

Real wages continue to rise, supporting household resilience. In Q1, wages increased to 0.98% just ahead of the 0.93% rise in prices. This helped lift the household savings ratio to 5.2%, providing a buffer for spending and contributing to improving consumer sentiment.

Population growth slows but supply barriers remain

Population growth has slowed, providing short term relief to Australia’s tight housing market. The federal government’s new cap on permanent migration is starting to have an impact, with net overseas migration easing to just over 100,000 in 2024.

However, slower population growth does not resolve the industry’s deeper supply side issues.

Development still constrained by feasibility challenges

Many large scale housing projects remain commercially unfeasible. Elevated construction costs, complex planning processes, and strict presale thresholds continue to limit the industry’s ability to deliver housing at scale.

Until these constraints ease, structural delivery challenges will persist, leaving a critical gap between housing demand and supply, even as population pressures temporarily ease.

This article references findings from our Q2 2025 Economic and Residential Market Report. Read the full report here.