Hit by higher inflation and interest rate expectations, Australian consumers are slowing down.
Despite economic growth figures exceeding Reserve Bank forecasts, NAB economist Jessie Cameron says softening consumption will reduce the urgency for more rate hikes.
Data released by the Australian Bureau of Statistics on Thursday showed household spending rose by 0.3 per cent in January.
The result was slightly below consensus forecasts and took the annual growth figure down from five per cent to 4.6 per cent.
A day earlier, GDP data showed Australia's economy grew at 2.6 per cent in 2025.
While that was the fastest in almost three years, consumption data underperformed, indicating momentum was likely to subside.
"This week's data is likely to leave the RBA a little less concerned about underlying momentum in consumer demand," Ms Cameron said.
NAB still expects the RBA to raise interest rates in May, given strong overall growth and the economy's lack of supply capacity due to low productivity growth.
JP Morgan economist Tom Kennedy said the January household spending result was still a decent outcome.
Overall growth would have been higher if not for a fall in measured spending on tobacco. Excluding alcohol and tobacco, spending growth would have been 10 basis points higher at 0.4 per cent, Commonwealth Bank senior economist Ashwin Clarke said.
The rise in the tobacco black market has made the category exceedingly unreliable.
With growth in disposable income slowing and the cash rate likely to move even higher, Mr Clarke anticipated a decline in household spending over 2026.
Viewed alongside the GDP data, which skewed towards public spending and inventories, it appeared the private economy was losing a little heat, Mr Kennedy said.
"This removes some of the urgency for the RBA to tighten policy and we expect the bank to pause in March, before delivering a further 25-basis point hike in May," he said.
But it doesn't mean any less urgency for meaningful reforms in the May budget to lift Australia's productivity potential.
Despite the uptick in activity, economists warn the economy is not in rude health.
As the nation's productivity rate was flat in the December quarter, economic growth was driven by Australians working more hours, not from producing more with each hour worked, BDO chief economist Anders Magnusson said.
"Without productivity gains, faster growth translates into inflation, rather than sustainably higher living standards," he said.
The RBA estimates the fastest growth rate the economy can sustain without pushing up inflation is about two per cent per, well below current 2.6 per cent.
The only way to increase the economy's capacity and sustainably boost living standards is with a pick-up in investment and a lift in productivity, EY chief economist Cherelle Murphy said.
"While there are signs of this, including more optimistic capital expenditure expectations, more encouragement from improved policy is needed," she said.
"The national accounts highlight the need for the government to move forward with productivity enhancing reforms in the 2026/27 budget."
While productivity grew one per cent over 2025 - higher than in the previous year - productivity and the total size of the economy were well below where their pre-pandemic trends suggested they should be, said Jonathan Kearns, chief economist at Challenger.
"And it looks like that's a gap we're not going to make up."
Federal Treasurer Jim Chalmers acknowledged the pressing economic challenges of inflation, productivity and global uncertainty, which had only been heightened by conflict in the Middle East and the prospect of an oil price spike.
"It'll be an ambitious budget regardless," he told ABC Radio National.
