'Green light' for rate hike as GDP growth surprises

The result was above consensus forecasts for a 0.3 per cent increase, as well as Reserve Bank projections for annual growth of 1.9 per cent.

After higher-than-expected July inflation data, the hot GDP result will add more pressure on the RBA to raise interest rates again as it struggles to close the gap between supply and demand in Australia's economy.

The market was fully priced in for another rate hike by Christmas, with money markets now seeing a three-quarter chance for a second hike by March 2027, IG market analyst Tony Sycamore said.

"Today's resilient GDP print is the final green light the RBA needs to hike rates for a fourth time this year, with Melbourne Cup day still the most likely date," he said.

Despite the impact of higher interest rates and the US-Iran war, GDP growth accelerated on a quarterly basis from 0.3 per cent in March.

Treasurer Jim Chalmers said it was "a robust result in really challenging international circumstances".

"People are still under pressure, but we can see in these national accounts that incomes are growing, housing investment picked up, there's a solid pipeline of business investment, and the private economy is driving the growth," he told reporters in Canberra.

The 2.1 per cent annual growth rate is faster than the RBA's assumed speed limit of two per cent, but it was a subdued result by historical standards.

Households continued to behave cautiously, ABS head of national accounts Grace Kim said.

"While increased spending and business investment occurred in pockets of the economy, imports supported much of the growth, moderating its contribution to overall GDP growth," she said.

Imports of goods rose 2.4 per cent, driven by increased purchases of cars and planes. Services imports fell 4.9 per cent as travel plans were disrupted by war in the Middle East.

"The number of Australians travelling overseas for the northern hemisphere summer fell for the first time since the COVID-19 pandemic, significantly reducing international travel expenditure," Ms Kim said.

Household consumption rose 0.4 per cent, with falls in fuel consumption and travel as a result of higher fuel prices.

But the oil crisis also supported some growth in electric vehicle purchases, which rose 10.3 per cent.

"The rise in electric vehicle purchases may have reflected households taking a longer-term approach to cost of living pressures, with some choosing EVs to help reduce ongoing expenses," Ms Kim said.

Meanwhile, private business investment declined 0.5 per cent, due to volatility in data centre investment.

Capital expenditure on data centres remained a key support for growth nonetheless. Machinery and equipment investment contracted 6.6 per cent in the quarter but was still up 15.9 per cent over the year.

The data centre build out is real, said Deloitte Access Economics partner Stephen Smith.

"But the lumpy nature of the investment and the import-intensity of the necessary equipment mean its contribution to GDP will be narrow and volatile quarter to quarter," he said.

GDP per capita was flat over the quarter, growing by 0.7 per cent over the 12 months to June.

Productivity was likewise flat, but fell 0.2 per cent over the year.

Real unit labour costs - a measure closely watched by the Reserve Bank for signs of cost pressures on businesses - rose 0.9 per cent.

Australia's weak productivity performance remained the economy's critical issue, with even historically modest growth rates resulting in an outbreak of inflation, Mr Smith said.

"Australia cannot spend its way out of weak productivity. Today's accounts show too little growth and too much inflation. The answer is investment, productive capacity and reform," he said.