Australia’s economy is growing—just barely. The March quarter delivered a 0.2% rise in GDP, annual growth stood at 1.3%, and GDP per capita actually fell by 0.4%. Productivity shrank by 1%. But the Treasurer, Jim Chalmers, insists there’s cause for optimism: the private sector, he says, is “stepping up” as public demand retreats. He calls it a gradual recovery. Critics call it stagflation.
The term stagflation is typically reserved for periods of stagnant growth, high inflation and high unemployment. Australia’s current unemployment rate—hovering around 4.1%—doesn’t scream crisis by international standards, but in the context of falling per capita output and rising living costs, it has many economists worried. John Adams, a long-time doomsayer from the fringe corners of Twitter (now X), declared the situation “economic armageddon.” Stephen Koukoulas, an economist with more orthodox credentials, was no less scathing, calling the GDP figure “a truly disgusting rate of growth.”
At the heart of this slowdown is what economists refer to as “capital shallowing.” It’s a technical term with a simple meaning: too many people, too little infrastructure. When population growth outpaces investment in transport, housing, digital systems and energy, the result is rising congestion, falling capital per worker, and eventually, a productivity drought. Australia now finds itself in this precise bind.
The Treasurer insists that the composition of growth tells a better story than the headline number. Private demand, he says, rose by 0.5%, outpacing overall GDP growth and accounting for the bulk of it. Consumption, business investment, and dwelling investment all moved upward. For the first time in nearly a year, all three rose in the same quarter.
Yet this optimism feels strangely detached from the lived reality of many households. The personal saving rate jumped to 5.2%, its highest level in more than two years—suggesting that households are cautious, not exuberant. Wage growth appears strong on paper, with compensation of employees rising 1.5% for the quarter and 6.5% through the year. But with real productivity falling and per capita output sliding, that growth isn’t translating into broader prosperity.
Pete Wargent, a property market analyst, pointed out that per capita GDP has now gone backwards for two quarters in a row. “Literally going nowhere,” he said. Tarric Brooker, who regularly dissects macro trends with forensic flair, added that GDP per working-age adult is falling even faster. “The current economic strategy is an absolute failure,” he wrote.
Some of this can be blamed on events outside Australia’s control. Cyclones and floods affected mining and port operations, dragging coal exports down 6.4% and slicing into overall goods exports. Meanwhile, the global economy has cooled. But others say that pointing to storms and distant central banks is missing the point. The deeper issue is structural: Australia is simply not investing fast enough to keep up with the size and needs of its population.
Take business investment. It rose just 0.4% in the March quarter, driven mostly by construction. While this is the highest level of new investment in 12 years, it’s still struggling to offset decades of underperformance. Since Labor took office, new business investment has grown by an annualised 4.4%—a notable rebound from the 1.3% decline under the Coalition. But viewed against the backdrop of mass immigration and a surging population, this isn’t catching up. It’s treading water.
The government’s $43 billion “Homes for Australia” plan is meant to supercharge dwelling investment, which did rise 2.6% in the March quarter. But with population growth now running at over 2.5%, that’s nowhere near fast enough to ease housing pressure. Rent inflation, one of the stickiest parts of the consumer price index, continues to climb.
Public demand actually fell this quarter—down 0.5%—as large infrastructure projects wrapped up and spending growth on programs like the NDIS slowed. This shift is deliberate. Labor wants the private sector to lead, not government stimulus. “Public demand has played a role in keeping the economy from going backwards,” Chalmers said. “But we know strong and sustainable economic growth is driven by the private sector.”
This strategy may please economists at the OECD, but on the ground it feels more like a slow drip than a recovery. GDP per hour worked, a key measure of productivity, is falling. Infrastructure projects are delayed. Road congestion is rising. If the private sector is indeed rising to the occasion, it’s doing so on a narrow ledge.
Inflation, meanwhile, has moderated. The consumption deflator—an internal measure of inflation tied to spending—came in at 3.3%, the lowest in three years. Real incomes per capita grew by 1.1% in the quarter. The Treasurer called this “the strongest quarterly growth rate for real incomes in more than three years.” That’s technically correct. But it’s also a rebound from a deep trough. And it’s partly driven by insurance payouts following natural disasters, which hardly qualify as a durable growth engine.
Interest rates remain high, though the Treasurer flagged that mortgage interest costs began to fall for the first time in several quarters. This may help households down the line, but the full effect of rate cuts won’t materialise for months. Until then, the RBA’s monetary policy remains a drag on household consumption.
It’s tempting to paint the situation as a contradiction: how can wages be rising, inflation falling, employment steady—and yet growth so anaemic? The answer lies in the denominator. Population growth is fuelling the illusion of expansion. Strip out the numbers on a per capita basis, and the economy is shrinking. The average Australian is earning more but getting less for it—less infrastructure, less time, less productivity.
As Adams, Wargent and Brooker all note in different ways, the current model is stretched. Australia is producing more people than prosperity. Whether this path leads to stagnation or renewal depends not on the next rate cut or quarterly blip in GDP, but on how seriously the country takes capital deepening—investing not just in housing, but in the systems that turn population into productivity.
Right now, that link is weakening. And it’s not just a statistical concern. It’s a future that looks increasingly crowded, underbuilt and slowing down—despite what the quarterly press releases say.
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📉#Australia's GDP grew just 0.2% in Q1 2025, with per capita output falling 0.4%. 💸 #Stagflation fears grow as productivity drops 1% despite wage rises. 🏘️ #Housingcrisis worsens as population growth outpaces investment. #TheIndianSun @TheKouk
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