Australia’s Slowing Economy Propped Up by Data Center Boom

9ikuvd93u)iolvg]mzf3o5}g_media_dl_1.png RBA, Federal Reserve, RBNZ, Bank

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(Bloomberg) — Australia’s economy decelerated last quarter, propped up by a massive surge in investment into data centers that helped cushion the early impact of higher fuel costs and rising interest rates.

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G­­­ross domestic product advanced 0.3% in the first three months of the year, just one-third of the pace recorded in the final quarter of 2025 and missing estimates, government data showed Wednesday. Private investment climbed by almost 4%, led by higher outlays on data centers, with a 16% jump in spending on machinery and equipment the largest gain in almost 30 years.  

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Australia’s economy has been buffeted and households squeezed by resurgent inflation and three consecutive rate hikes, capped by an energy shock unleashed by the war in Iran. The Reserve Bank is aiming to cool activity and stave off second-round inflationary effects from higher fuel costs, while the government is trying to rein in outlays to avoid adding to price pressures.  

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Westpac Banking Corp. economists led by Pat Bustamante estimate the net effect of the investment in data centers, “including spillover effects, drove all the growth this quarter.” 

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“The economy was clearly slowing even before the conflict in the Middle East and interest rate hikes had really started to impact,” he said in a research note. “The headwinds from these developments will be more fully reflected in the second quarter of 2026, with the possibility of a quarterly contraction.”

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The RBA will closely scrutinize the report ahead of its mid-June meeting to decide whether it has sufficiently tightened policy to put inflation on track to return to the midpoint of its 2-3% target. The central bank last month raised the cash rate to 4.35%, fully unwinding a brief easing cycle in 2025.

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Australia’s policy-sensitive three-year government bond yields retreated after the data. Money markets reckon the RBA will stand pat in just under two weeks’ time and are wagering a 50-50 chance of another hike in August, while fully pricing a December move.

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“Labor market conditions remain relatively tight, while elevated crude oil prices continue to pose upside inflation risks,” said Wee Khoon Chong, APAC Macro Strategist at BNY. “There is no room for complacency, and the risk is that the RBA hikes again if inflation expectations remain persistently high.”

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Stephen Smith, partner at Deloitte Access Economics, said the figures show that Australia’s economic momentum is fading and the quality of growth has deteriorated with net exports declining and household spending faltering.

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“For policymakers, the result is uncomfortable,” Smith said. “The economy is cooling, but not in a way that suggests inflation will fall neatly back to target.” 

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He noted that productivity growth weakened again while unit labor costs remain elevated, “meaning the Reserve Bank will see softer activity, but not necessarily evidence of easing domestic cost pressures. A fourth rate hike in 2026 is still on the table.”