Q4 2025 National Accounts Update

An update to my December 2025 Economic Outlook

Introduction

Every national accounts release contains both good and bad news, and Q4 2025 is no exception.

GDP per capita is improving. Labour productivity is moving in the right direction. Real wages have reached a new high. These are genuine improvements, not statistical noise, and they deserve acknowledgement.

But the balance of this release tilts toward concern rather than celebration. Domestic inflation remains stubbornly above target. Unit labour costs are still too high. Government spending continues to crowd out private activity. And the RBA is now reversing rate cuts it should not have made.

This is not a crisis. It is not the end of the world. But the list of issues requiring attention is longer than the list of developments deserving applause.

The Headline: GDP Growing above Inflationary Speed Limit

GDP growth has lifted from the anaemic sub-1.5% rates seen through much of 2024. But 2.56% annual growth is not a recovery – it is the economy running above its compressed speed limit of roughly 2%. Australia’s potential has fallen over the past decade as productivity stagnation has lowered the economy’s supply capacity.

The December outlook argued that near-2% growth reflects supply constraints rather than demand deficiency. The Q4 data confirms this: growth has accelerated and domestic inflation remains elevated. That combination only occurs when an economy is at/above capacity. There is no spare room here.

Per Capita: Turning the Corner?

There is one genuinely encouraging development in Q4. GDP per capita rose 0.4% in the quarter and 0.9% through the year – the strongest per capita reading in some time and a sustained improvement after nearly two years of decline and stagnation. Nonetheless, we are still behind where we were just three years ago.

The Number That Matters Most: GNE Deflator at 3.7%

The Gross National Expenditure deflator measures the prices of goods and services purchased domestically – consumption, investment and government spending – stripping out export and import price movements. It is arguably the cleanest read on domestic inflation pressure in the national accounts.

At 3.7% annual growth, it sits well above the RBA’s 2–3% target band. Not near the top of the band. Above it entirely.

The quarterly profile is damning: 1.17%, 0.19%, 1.34%, 0.95% over the past four quarters. Set aside the anomalous Q2-2025 print and the run-rate is not inconsistent with around 4% annualised inflation.

My December outlook warned that sustained sub-3% inflation would require more labour market slack. The national accounts say we are not even close.

The Mechanism: Unit Labour Costs Won’t Stop

Nominal unit labour costs – the labour cost of producing each unit of output, which rise when wage growth exceeds labour productivity growth – have risen from 77 in mid-2021 to 107, a 39% increase in four years in an almost unbroken upward trend.   

Annual growth has slowed from the 6–7% peaks of 2022–23, but at 3.25% it remains well above the pace consistent with the inflation target. The mechanism is straightforward: when wages grow faster than productivity, the gap shows up in higher costs per unit of output, which feeds directly into domestic prices.

The latest quarter offers a glimmer, but nothing in the broader data suggests a productivity turnaround is arriving. If the next two quarters deliver nominal ULC growth at or below 0.6%, there may be genuine cause for optimism – but one quarter does not make a trend, and this series has a long history of false dawns.

Labour Productivity: Good but Not Good Enough

Labour productivity growth turned positive through 2025, reaching 1% YoY – genuinely welcome after two years of choppy decline. But good isn't good enough: the latest quarter was flat, and at this pace productivity remains well below the 1.5 to 2% historically needed to support strong real wage growth and stable inflation.

The market sector result – 1.5% YoY – provides more reason for optimism. But it also masks a genuine concern: the non-market sector is underperforming, and with government consumption at a record 23% of GDP and rising, that drag is becoming harder to ignore.

Government Spending Doing the Heavy Lifting

Government consumption has reached a record 23% of GDP, up from roughly 21.5% pre-COVID and still rising. Public investment has increased to 5.55% of GDP, up from around 5% before the pandemic.

The public sector’s direct claim on the economy is at historically high levels with no sign of consolidation. This is not a cyclical response – it is a structural shift upward in the government’s share of activity, driven by the expansion of care economy services, NDIS, defence, and infrastructure spending.

The consequence is that monetary policy is trying to restrain demand that fiscal policy is simultaneously expanding. The RBA is fighting with one hand while the government pushes with the other.

Households: Repairing, Not Spending

Households are now rebuilding – the saving ratio has recovered to 3.81% of GDP, up from lows near 1.5% in early 2024. This is prudent behaviour, but it constrains consumption.

The spending profile reflects this caution. Discretionary consumption was essentially flat for two years through 2023 and into 2025 before lifting modestly in recent quarters. Essential consumption ($209B/quarter) grinds steadily higher – people have to eat – but the discretionary side shows households choosing repair over spending.

The three rate cuts through 2025 eased some pressure, but they did not unleash a consumer boom. Nor should they have – households were rebuilding balance sheets, not waiting for permission to spend.

The Profit–Wage Rebalancing: Necessary but Inflationary

The profit share has fallen from a peak near 38% to 33.3%, returning to the long-run average. Real wages per capita have reached a new all-time high at $11,300 per quarter. In distributional terms this is the rebalancing that workers needed after the pandemic-era profit surge.

But here is the bind. When wage growth outpaces productivity growth, the adjustment that improves household incomes is the same adjustment that keeps unit labour costs elevated and domestic prices rising. The RBA cannot welcome the wage gains without confronting the inflation they generate. The rebalancing is necessary, desirable even – and inflationary. There is no clean resolution to this while productivity growth remains absent.

The External Sector: From Tailwind to Headwind

The terms of trade have fallen from a peak of 115 in 2022 to 95.8 – a 17% decline. Net exports contribute just 1.25% of GDP in volume terms, near historical lows.

The commodity boom that supported national income through 2021–22 is over. The December outlook flagged that China is unlikely to deliver another stimulus-driven commodity surge, and global trade fragmentation under the Trump tariff regime adds further risk. The external sector offers no relief – if anything, it is more likely to subtract from growth than add to it.

The Policy Response: Three Cuts Too Many

The RBA eased three times through 2025, cutting the cash rate from 4.35% to 3.60%. In February 2026 it reversed course with a 25 basis point hike to 3.85%. Further hikes are highly likely – at least one more in March or May, and probably another before year-end. A fourth hike in 2026, while less likely, is not impossible. 

In hindsight, the three cuts in 2025 were a policy error. The GNE deflator was signalling sticky domestic inflation throughout 2025. The labour market, with unemployment at 4.1% – still below most estimates of NAIRU between 4.5% and 5.0% – was never weak enough to justify easing. Market sector GVA was flat through 2023–24 before jumping to $465B, consistent with an economy at capacity, not one needing stimulus.

Bottom Line

The Q4 2025 national accounts are telling us:

1. The speed limit is real. GDP growth of 2.56% alongside a GNE deflator at 3.7% means the economy is at capacity – not recovering, not underperforming, but running into its supply-side constraints.
2. Productivity remains the core structural failure. Unit labour costs at 3.25% growth with no MFP improvement in sight. Until this changes, nothing else can.
3. Government is the growth engine. Public consumption at a record 23% of GDP, masking private sector mediocrity and working directly against monetary policy.
4. The 2025 rate cuts were premature. Now being reversed, with more tightening to come. The RBA’s own forecasts assumed productivity improvement and wage moderation that did not materialise.
5. Per capita living standards are improving, albeit slowly. But we are still behind where we were three years ago.
6. The inflation problem is domestic and structural. Not imported, not transitory, not amenable to waiting it out.

The policy implication is uncomfortable but clear. The RBA needs to tighten further into an economy where per capita output is barely positive and households are still repairing their balance sheets. That is the stagflationary bind – not a crisis, but a prolonged grind where the economy needs slower demand growth it cannot easily afford, to resolve inflation pressures it cannot otherwise escape. The margin for error is thin, and the margin for good news is thinner.