Australian economy stalls as GDP growth plunges and productivity falls after RBA rate rises

Australia’s faltering economic growth during the Middle East war could stop the Reserve Bank from hiking interest rates any further, with productivity going backwards in the opening months of 2026 despite a boom in AI-led investment.

A long run of poor productivity is worsening Australia’s inflation challenge, as costs are passed on to customers, potentially sparking a stagflation problem where the Reserve Bank stops raising interest rates in a bid to limit rising unemployment.

The Australian Chamber of Commerce and Industry, the nation’s largest employer group, noted the economy was already in trouble before the Iran war worsened inflation.

“The outlook for business is very worrying, and the prospect of higher taxes on business investment and trusts only adds to that concern,” ACCI’s chief of policy and advocacy David Alexander said.

Treasurer Jim Chalmers admitted Australia’s weak productivity was a problem, 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 said 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.”

But Dr Chalmers claimed the boom in artificial intelligence investment could eventually reverse a longstanding stagnation in Australian productivity and revive the golden era that followed the introduction of the internet in the mid-1990s.

“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,” he said.

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

Shadow treasurer Tim Wilson said Prime Minister Anthony Albanese’s Labor Government was to blame for the worst quarterly productivity drop in two years, with high public spending now failing to sufficiently boost economic activity without stirring inflation.

“The Albanese Government’s policy is acting like a wrecking ball through the economy before Iran and the Budget, and since then the only solution to the small business and household confidence crisis is higher taxes”, Mr Wilson said.

“The Treasurer is in complete denial about the impact of the wrecking ball of his policy, and he keeps using public spending through private sector as a smokescreen.”

He also accused Labor of relying on high immigration to ward off a technical recession.

“The numbers show that the Australian economy is basically being propped up by migration, by nearly two million people since Labor has come to office,” Mr Wilson said.

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, as the annual pace of expansion remained at 2.5 per cent.

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.

The Commonwealth Bank, Australia’s biggest home lender, is now expecting the RBA to stop hiking rates any higher.

“We continue to expect no further rate hikes by the Reserve Bank of Australia with signs of a softening in activity outweighing lingering inflation concerns,” CBA’s head of Australian economics Belinda Allen 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 for worsening Australia’s terms of trade making imports more expensive.

“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.”

The AI 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 NSW and Victoria.