Government spending and a sharp decline in Australians’ overseas travel amid the conflict in Iran are providing unexpected support to Australia’s economy, helping to offset broader signs of economic weakness.

Data from the Australian Bureau of Statistics (ABS) showed government consumption rose 0.6 percent in the quarter to June, reaching over $159 billion when adjusted for inflation. However, a drop in government investment limited total public demand growth to 0.2 percent for the quarter, contributing just 0.1 percentage points to the gross domestic product (GDP) figures expected for release this week. This accounts for roughly one-third of the 0.3 percent quarterly growth anticipated by market analysts.

The Reserve Bank of Australia recently revised upward its projections for government spending over the next year. The central bank cited factors such as increased population growth, broad increases in public consumption, and planned state government investment as key drivers of this trend.

Despite increased tax revenue, with governments collecting more than $20 billion in additional taxation during the second quarter, the national net operating balance deteriorated by $3.6 billion to a deficit of $2.8 billion. Westpac economists attributed much of this spending to ongoing structural programs like the National Disability Insurance Scheme (NDIS) and various cost-of-living initiatives implemented by federal and state governments.

“Public consumption is growing at 2.2 percent year-on-year, significantly below the pre-pandemic average of 3.5 percent,” Westpac noted, highlighting a slowdown in growth despite the quarterly increase.

Trade figures also offered some surprises, as the ABS reported the largest drop in service imports since the height of the pandemic. A 12.7 percent decline in travel-related imports corresponded with the first fall in international departures by Australians since the pandemic began. Overall, imports rose just 0.5 percent in the quarter, while exports increased by 0.8 percent.

Nevertheless, the current account deficit widened by $1.8 billion in the June quarter, reaching its highest quarterly trade deficit since late 2016. ANZ’s head of Australian economics, Adam Boyton, attributed the deficit largely to a weaker trade balance.

Rising fuel prices, spurred by reduced global supply linked to the Middle East conflict, contributed significantly to the pressures on trade. The terms of trade fell 1.6 percent as import prices, led by a surge in fuel costs, outpaced export gains.

ABS head of international statistics Jonathon Khoo noted that trade in goods and services continued to weigh on the current account, with record imports of fuels and passenger vehicles playing a major role. Fuel imports soared 42.5 percent in the June quarter, while imports of non-industrial transport equipment, including electric and hybrid vehicles, jumped 38.1 percent. The increase in electric vehicle imports reflects both shifting consumer preferences and growing concerns over fuel security amid escalating energy costs.