Australia’s economy was growing at an annual rate of 2.6 per cent in the December quarter, up from 2.1 per cent in the previous quarter.

It is the fastest rate of growth in almost three years, and much stronger than expected.

On a quarterly basis, the economy grew by 0.8 per cent in the December quarter, which was stronger than the 0.5 per cent recorded in the September quarter.

In the RBA’s most recent forecasts released in February, the RBA said it was expecting the economy to be growing at an annual pace of 2.3 per cent by the end of last year, not 2.6 per cent.

The strong growth in economic activity coincided with inflation rising by more than anticipated towards the end of 2025.

It helps explain why the RBA was forced to raise interest rates in February to try to dampen economic activity and bring inflation back down.

Higher profits, increased investment spending, higher savings, but slow wage growth

Bureau of Statistics (ABS) data show growth was broad-based in the December quarter, with increases in economic activity observed in a large majority (17 out of 19) of industries.

The increased activity drove stronger profits.

Profits for all corporations increased 2.2 per cent in the December quarter, the highest quarterly increase since March quarter 2023.

RBA staff are monitoring Middle East war for economic fallout

Michelle Bullock says events are moving rapidly and there are different ways the war could play out, with RBA staff closely monitoring the situation.

Higher mining activity, matched with higher export prices for iron ore and thermal coal, drove a rise in mining profits, which increased 5.7 per cent in the quarter.

But profits from liquefied natural gas (LNG) fell, with prices falling due to a global over-supply of gas and weak demand.

Private investment increased for the fifth consecutive quarter.

“Investment in data centres and aircraft was maintained at high levels,” Grace Kim, ABS head of National Accounts, said.

Commonwealth government investment grew 3.3 per cent, driven by higher investment in a range of defence assets, while state and local government investment grew 1.4 per cent, driven by transport infrastructure.

The household saving-to-income ratio increased to 6.9 per cent, up from 6.1 per cent in the September quarter.

That saving ratio is now at its highest level since the September quarter in 2022.

Inflation, interest rates, the Middle East war and oil prices

Some economists say the annual growth rate of 2.6 per cent exceeds their estimate of the economy’s potential growth — the speed at which the economy can expand without overheating and pushing inflation higher.

They say it will keep the RBA on high alert and increase the likelihood of a rate hike in May.

“The key question for 2026 is how quickly growth will slow and how policymakers will respond,” Stephen Smith, partner at Deloitte Access Economics, said.

Oil tankers stopped in Strait of Hormuz

The Strait of Hormuz normally has 50 ships moving over 100 metres, but today there are virtually zero.

“As February’s rate hike takes hold, consumers and businesses will rein in spending plans, dampening the outlook.

“Adding to the uncertainty are the events in the Middle East. 

“While it is too early to draw out any economic implications for Australia, if oil prices were to rise substantially over coming months, the resulting inflationary pulse would add a further degree of difficulty to the RBA’s task of balancing growth and inflation.”

David Bassanese, BetaShares chief economist, said the December quarter GDP data did not appear to provide the smoking gun the RBA would need to justify an interest rate hike as early as this month’s meeting.

But he said the surge in geopolitical risks associated with the conflict in the Middle East was complicating the outlook, at least in the near term.

Marine tracking data shows a drastic reduction in the movement of large oil tankers through the Strait of Hormuz, south of Iran, which is putting upward pressure on the price of crude globally.

“While the conflict poses an upside risk to inflation through higher oil prices, it also creates an offsetting downside risk to non-energy inflation if extended hostilities undermine business and consumer confidence both at home and abroad,” Mr Bassanese said.

“At this stage, the case for an RBA rate hike still appears to rest critically on the March quarter consumer price index (CPI) report in late April.”

Treasurer says Iran conflict could put upward pressure on prices

Federal Treasurer Jim Chalmers said the data showed that Australia’s economy recorded faster growth in 2025 than every major advanced economy.

He said it would provide a “very robust foundation” from which Australia could confront intense global economic volatility, which has been made worse by the dramatic escalation of hostilities in Iran and across the Middle East.

The RBA nightmare no-one saw coming

Before trading got underway on Monday, there was something of a bidding war on how far oil prices could surge, beginning at $US100 a barrel, right through to $US150.

Mr Chalmers said a key driver of public final demand in the December quarter was a 3.3 per cent lift in defence spending.

“Around half of the quarterly rise in defence spending was on recruitment of staff and half was investments such as naval programs, land combat vehicle manufacturing and imports of defence weapons platforms,” he said.

“The upcoming budget will have the right focus on addressing inflation, boosting productivity and managing global economic uncertainty, and today’s numbers are an important reminder that we face these challenges and these uncertainties from a position of genuine strength.”

He also told reporters that he expected the surge in oil prices to put upward pressure on prices and inflation in Australia.