National accounts: Australia economy stalls as GDP growth plunges and productivity falls after RBA rate rises

Australia’s weaker economic growth during the Middle East oil crisis could stop the Reserve Bank from hiking interest rates this month, with productivity in the opening months of 2026 going backwards despite a boom in AI-led investment.

Treasurer Jim Chalmers admitted Australia’s weak productivity was a concern, with Labor seeking to impose a new 30 per cent capital gains tax on business start-ups that could potentially stifle innovation.

“Obviously, we’re doing much more in the Budget and elsewhere to try and turn that productivity performance around,” he told reporters in Canberra on Wednesday.

“We know that this is a longstanding challenge and it will take some time to shift and the Budget, more than Budgets that we’ve seen, probably since the 1990s, took the productivity challenge seriously.”

Dr Chalmers also claimed that a boom in artificial intelligence investment could reverse the two-decade stagnation in Australian productivity that followed the big gains from the early internet era that had started in the mid-1990s.

“Despite all of the doomsayers and everyone who wants to talk the economy down, we’re seeing a boom in private investment and that’s a good thing,” he said.

“And in time, by seeing these investment figures flow through into our economy, that will be an important part of shifting what has been a couple of decades now of poor performance on productivity.

“The key conclusion here is that the pick-up in private investment, the private economy more broadly, is a really important strength as we confront a challenging global economic environment.”

Gross domestic product in the year to March 30 eased slightly to 2.5 per cent, down from an annual pace of 2.6 per cent last year.

But during the March quarter alone, GDP growth plunged to 0.3 per cent, down from 0.9 per cent during the final three months of 2025.

That followed the Reserve Bank’s rate rises in February and March that took the cash rate to 4.1 per cent before the May increase saw that rise to a new 15-month high of 4.35 per cent.

“Growth was stalled due to weaker trade, subdued government spending, and a cautious consumer, all pulled in the same direction,” Convera head of market insights Steven Dooley said.

Moody’s Analytics head of Australian economics Sunny Nguyen said the weak growth figures could see the Reserve Bank hold off on a rate rise in less than two weeks’ time.

“So, the RBA’s next move is wait-and-watch, not another hike,” she said.

“The March print confirms our view that the economy is cooling fast enough, and the labour market is starting to feel it.”

Productivity also fell by 0.6 per cent in the March quarter for a very weak annual growth pace of 0.3 per cent, despite soaring investment in new AI data centres.

GDP per capita, based on population, was down 0.1 during the first three months of 2026 for a lacklustre annual increase of 1 per cent.

Household consumption was also weak, growing by just 0.5 per cent, with KPMG chief economist Brendan Rynne blaming the Middle East war.

“Australia has for some time had the rest-of-the-world add to our economic prosperity through purchasing our goods and services, particularly our natural commodities, at increasing rates and often at increasing prices,” he said.

“Unfortunately, however we aren’t in the same position today, with Australia, like most non-major oil producing countries experiencing a negative terms of trade shock due to the ongoing Middle East conflict.”

But the artificial intelligence revolution is boosting private investment which grew 3.6 per cent, led by machinery and equipment soaring 16.3 per cent in the March quarter alone thanks to increased business investment in data centres across New South Wales and Victoria.