Q1 2026 GDP: A Soft Quarter, an Above-Potential Year

The headline reads as solid for the year but weak for the quarter. The AI/data centre investment boom is largely discounted because the equipment was imported rather than produced in Australia. Once the imported equipment is netted out, the boom adds nothing to GDP. What remains is an economy still running above its annual speed limit, inflation that has mostly returned to the band but is not all the way home, and a productivity trend that continues to disappoint.

The quarter itself was quite soft. GDP rose just 0.27% in the March quarter, well below the 0.87% of the quarter before and below my own nowcast of around 0.5%. A single quarter's figure is an unreliable guide at the best of times. The through-the-year figure is the one that usually matters, and at 2.52% it sits uncomfortably above the RBA's potential growth estimate of roughly 2%. And that 2% is itself flattered by strong population growth feeding the labour input in the production function, with productivity adding almost nothing. The economy is running hot in the least healthy way: adding bodies and hours rather than output per hour. The fear is that another weak quarter will see a substantial reduction in the through the year figure because of base effects (when the 1pp contribution from Q2 in 2025 drops off).

Weekly Energy Update

 Australian Fuel Gate Prices

Of note: the Fair Work Commission has a proposal before it to extend the diesel cost pass-through for truckies. 

GDP nowcast update

Summary

I've been working on a GDP nowcast over the last few months. Three models now, all pointing at a hot 2026 Q1. The rest of this post is about why I don't fully believe them.

I foreshadowed this work back in April with a Bridge model write-up. The Bridge has been refined since then. It now runs 13 bridges rather than the 7 in the April post (private capex and construction split out as their own bridges, the NAB conditions survey added, household spending brought in alongside the existing consumption bridge), and most of the within-quarter data is in. The remaining pieces, business profits and government final consumption, are out next Tuesday, one day before the national accounts. So this isn't quite the final pre-release nowcast, but it is close.

In addition to the Bridge model I now have a dynamic factor model (DFM) and a Bayesian Vector Auto-regression (BVAR) model. Three independent ways of producing a nowcast running on a similar input panel.

Here is where they land for 2026 Q1.

Model	QoQ %	TTY %	70% CI (QoQ)	90% CI (QoQ)
Bridge	+0.82	+2.96	[+0.54, +1.12]	[+0.38, +1.30]
DFM	+0.69	+2.83	[+0.02, +1.36]	[−0.37, +1.75]
BVAR	+0.80	+2.95	[+0.22, +1.39]	[−0.12, +1.73]

The three models agree on a print near +0.7 to +0.8 QoQ, roughly +2.8 to +3.0 TTY. The Bridge runs the narrowest band because it conditions on monthly indicators directly. The DFM and BVAR widen as expected given their factor and VAR formulations.

Update on the Iran War

Context

Each month I have taken the opportunity to reflect on the war in Iran and consider what might happen next. This is the fourth piece in that series.

Eighty-nine days after Operation Epic Fury began, the war is closer to its end than it has been at any prior point. The Mexican standoff I described on 1st May appears to be resolving in substance, with Trump taking a Bath, which the May piece called as the most likely outcome. Trump has not yet signed and surrendered. But the question is less whether he will and increasingly: when he will.

On 23 May US time, Trump posted on Truth Social that a deal had been "largely negotiated, subject to finalization." The deal as described in regional press includes an official declaration of the war's end, a 30 to 60 day window for nuclear talks, gradual reopening of the Strait of Hormuz with Iran continuing to manage access on a fee basis, and US ending its blockade of Iranian ports. Iran's foreign ministry, through spokesperson Esmail Baghaei, publicly described the emerging text as a "framework agreement." Iranian Parliament Speaker Mohammad Bagher Qalibaf travelled to Qatar to take part. Fars News, the IRGC-affiliated outlet that had spent two months denying that negotiations were occurring, confirmed implementation details and corrected Trump's characterisation by stating publicly that Iran would continue to manage the waterway.

This is largely the same deal Iran put on the table on 28 April. The terms have not moved in Trump's favour. The position has been publicly acknowledged by Iran for the first time. The signature has not yet arrived.

Inflation Targeting vs nGDP Targeting

What Are We Talking About

Today's blog post is very technical. We are talking about which variable should be the focus of a central bank when it sets interest rate policy. Most of the world's central banks use an inflation target, typically around 2 per cent, although Australia has a 2 to 3 per cent target band and within that it targets the 2.5 per cent mid point. An alternative which is often promoted is nominal gross domestic product (nGDP) targeting, where the bank aims to maintain a steady growth rate or path for nGDP.

Weekly Energy Update

 Wholesale prices

Wholesale prices were up a touch at the end of this week.

Australia's Productivity Slump

In my last post I argued the Aussie dollar is being held up by the carry rather than by the fundamentals. The biggest of those rotten fundamentals is productivity growth. Australian labour productivity sits below where it was in 2019. Capital deepening has collapsed to zero. Multifactor productivity peaked in 2004 and has gone nowhere since. The slump is deep and it has been persistent.