The latest ABS release indicates that Australia’s economic growth is stabilising, recording 2.5% year-on-year growth and 0.3% in Q1 2026 (Figure 1). Private sector consumption has remained relatively steady, while government expenditure has begun to decline in 2026. Despite this, government spending continues to grow at an annual rate of 2.8%, slightly above the overall economic growth rate.
Besides consumption, capital formation is a key driver of growth, reflecting ongoing investment activity. In particular, investment in machinery and equipment has shown a notable increase. In contrast, trade activity (export and import) has weakened, as expected, largely due to global disruptions and continued uncertainty surrounding tariffs and international supply chains.
Figure 1: GDP Growth
Looking ahead, both the Reserve Bank of Australia (RBA) and the Treasury project a near-term contraction in the Australian economy. This reflects the tightening of monetary and fiscal policy to manage inflation—through higher interest rates and reduced government spending, particularly in non-investment areas.
FWPA analysis suggests that household and government expenditure indices are beginning to stabilise in the near term (Figure 2), which is likely to constrain economic growth through to late 2027 (Q4 2027). These projections are consistent with trends observed over the past four quarters, as well as recent indicators of business and consumer confidence.
Figure 2: Capital Formation of Government and Household Consumption
From a timber industry perspective, dwelling activity is also expected to stabilise (Figure 3). While building approvals have increased, the transition to construction has remained relatively flat, highlighting ongoing capacity constraints such as shortages of skilled labour.
At the same time, renovation activity (alterations and additions) has increased steadily over the past two years and is expected to remain increased in the near term, though within existing capacity limitations.
Figure 3: Capital Formation of Dwelling Activities
Overall, the Australian economy is expected to experience a period of modest contraction in the near term, in line with global trends and largely driven by the lagged effects of global economic shocks and policy tightening.
