The Australian Industry Group has warned that the nation’s economic recovery is faltering amid ongoing weakness in the private sector, underscoring the need for urgent policy reforms to stimulate investment and productivity.
Australia’s annual GDP growth rate remained unchanged at 1.3% in the March quarter of 2025, falling short of forecasts and expectations of a modest rebound. The latest figures revealed broad-based weakness, with slowing private demand and declines in both public demand and trade contributions.
Innes Willox, Chief Executive of the national employer association Ai Group, said the lack of momentum in the private sector had left the economy “listing” following the wind-down of government stimulus.
“The government stimulus that accounted for the majority of growth in 2024 has now tapered off. Without a material uplift in private sector investment and productivity to compensate, this has left the economy listing,” Willox said.
While government spending had supported growth during the pandemic recovery, Mr Willox said the reliance on public funds was neither sustainable nor sufficient in the current environment.
“It is natural and appropriate that government spending is now moderating – Australia cannot spend our way out of economic trouble forever. But the dismal conditions in the private sector need to be urgently corrected to take up the slack.”
Willox cautioned that Australia could become increasingly vulnerable in the face of global pressures, including the impact of new US trade barriers and continued inaction on productivity-enhancing reforms.
“With the impact of US trade barriers about to flow through, coupled with our paralysis on real productivity reforms, Australia is at risk of becoming an economic sitting duck,” he said.
The March quarter data showed industry output growth of 1.2%, but this was largely driven by a 2.6% rise in non-market industries such as health, education and public administration – sectors predominantly funded by government.
In contrast, private-sector industries including mining, manufacturing and professional services have entered technical recession, while construction, retail, and hospitality remain sluggish.
“The handover from public to private-sector led growth has yet to materialise as hoped,” Willox said. “With consumer spending still weak and industrials facing hard conditions, business conditions remain anaemic across much of the private sector.”
Productivity performance also remained flat, with no improvement in labour productivity for the quarter and a year-on-year decline of 0.9%. Willox said the figures highlighted a worsening trend.
“Productivity is the well-spring of national wealth, and we cannot let productivity continue to decline quarter after quarter,” he said.
According to Ai Group, the market sector saw only a 0.1% improvement in productivity, which was offset by declines in government-supported sectors. Labour productivity now sits below pre-pandemic levels.
Business investment also contracted in the March quarter, with non-mining investment falling 0.5% and machinery and equipment investment dropping 1.7% – a concern given its central role in driving productivity.
“The combination of global uncertainty and poor local conditions is seeing businesses pull back on their investment commitments,” Willox said. “As business investment is a leading indicator, this augurs poorly for a turnaround in private sector growth or productivity materialising later in 2025.”
The labour market remained a rare bright spot, with hours worked up 2.3% over the year. However, Ai Group warned that the majority of employment gains continued to come from government-supported sectors.
“Labour market resilience is not sustainable if dependent on ever-increasing taxpayer funding for non-market job creation,” Willox said. “Persistently negligible levels of job creation in the private sector will lead to worsening labour market outcomes as government spending continues to moderate.”
Willox called on policymakers at both state and federal levels to act swiftly to restore confidence and productivity in the private sector.
“We cannot waste any more time getting our vital policy settings right and embarking on meaningful economic reform,” he said.
