Australian dwelling approvals slide in January

Australian dwelling approvals fell to a 19-month low in January after declining by 7.2% in the opening month of 2026, a material surprise on expectations for a 5% rise. Higher-density or unit approvals were down 21% on the month following an even larger fall in December (-32.7%). By contrast, house approvals notched a 1.2% rise to reach their highest level since August 2022. Despite favourable dynamics of rising housing prices and RBA rate cuts, dwelling approvals failed to fire in 2025. They now head into 2026 where the RBA has already started to reverse course.  

Dwelling approvals fell to their lowest level since June 2024 after a 7.2% decline in January (14.6k). Because of the volatility in the series, consider that approvals averaged 16.2k per month over the past 3 months. In January 2025, approvals were averaging 16k. This highlights that growth in approvals has been remarkably subdued, especially when taking into account that the RBA cut rates on 3 occasions through this period. House approvals have risen - though it has been a slow grind - leaving swings in the much more volatile higher-density segment to dictate the overall direction of approvals. 

The available estimates point to broad-based weakness across the higher-density segment. Approvals have trended downwards for high-rise and townhouses. Low-rise approvals have also been weak.

Drilling down further, Melbourne looks to be the city that has driven the weakness in this segment, though other cities have also played a role. 

Work approved in the alterations space climbed to new heights at just below $1.3bn on the back of a 1.6% lift in January. This comes after an increase of a little more than 4% in the final quarter of last year. This looks largely to be a price-driven increase, with recent construction activity data indicating that the volume alteration work completed largely stalled in the December quarter.  

Australia Current Account -$21.1bn in Q4; net exports -0.1ppt

Australia's current account deficit widened to $21.1bn in the December quarter from $18.3bn in the September quarter. At almost 3% of GDP, this was the largest deficit seen since the middle of 2018. Solid growth in imports (1.8%) reflected the ongoing strength in domestic demand, outpacing exports (1.4%). Overall, net exports are expected to deduct 0.1ppt from GDP growth in the December quarter.     

 

The current account deficit was $21.1bn in the December quarter, some $2.8bn larger than in the previous quarter, with payments to foreign investors increasing as domestic investors saw lower returns from investments offshore. This was the 11th consecutive deficit, and the widest in 10 years. Measured another way, the deficit was 2.9% of nominal GDP (using Q3's nominal GDP), the largest since Q2 2018.   

Only around 4 years ago, the current account was printing record surpluses of more than 3% of GDP, delivering a significant revenue windfall for Australia. Since then, commodity prices have come off their highs and the post-Covid surge in inflation drove up import prices. Those dynamics are reflected in the rollover in the terms of trade. But Australia's floating exchange rate buffered the economy from an income shock, with current account deficits weighing on the AUD, a boost for exports. But if the recent strength in the AUD is sustained - it is currently at its highest since 2018 on a trade-weighted basis - then the macro dynamic changes.  

The trade surplus was a wafer-thin $1.3bn in the December quarter. Exports rose by 3.2% to around $172bn, with prices up 1.9% and underlying volumes lifting by 1.4%. The key driver of volumes was iron ore (3.9%), which saw its strongest rise since mid-2020. Spending on imports rose by 3.3% to $170bn. Within this, import prices increased by 1.4% and volumes lifted by 1.8%. Consumption goods volumes increased by 2.5%, with gains across items such as clothing and footwear, vehicles and household appliances, indicating consumer demand remained robust. 

Due to the 1.8% rise in import volumes outpacing the 1.4% growth in exports, the net exports component is estimated to weigh on GDP growth in the December quarter by 0.1ppt. Expectations were for a 0.3ppt reduction, so this was an upside surprise.   

Australian Business Indicators Q4: inventories -0.1%

Australia's Business Indicators data were broadly reflective of a solid domestic economy in the December quarter. Sales volumes rose by 0.6% to be up by 1.2% across the back half of 2025, lifting from growth of 0.9% in the first half. Robust demand is seeing inventories decline, which fell for the second quarter in succession, and supporting rising company profits.  

Ahead of the National Accounts on Wednesday, today's report on the business sector suggests that private inventories will add 0.2ppt to GDP growth in the December quarter. Strong demand is seeing inventory levels decline. But the decline in the latest quarter was a smaller 0.1% compared to 0.8% in the previous quarter, a dynamic that will add positively to GDP.   

As highlighted, demand has been robust. Sales rose by 0.6% in the December quarter and 2.1% through the year. The chart below shows that sales have risen broadly across the economy in the December (green bars) and September quarters (gold bars). The only surprise was the decline in arts and recreation in the latest quarter (-1.5%) given the reporting has been that major events and concerts were well attended, but this follows several quarters of strong growth.  

The domestic demand backdrop and higher commodity prices drove company profits to increase by 5.8% in the December quarter, their fastest rise in three years. On an inventory adjusted basis (a closer methodology to that used in the National Accounts), profits were up 4.8% in the quarter. Profits in the non-mining sector rose by a solid 4.4% for the quarter while the mining profits accelerated by 8.1% - the fastest growth recorded since the middle of 2022.   

Wage incomes continued to rise, albeit at a slower clip of 0.9% in the December quarter. Prior to this, wages rose in excess of 1% in each of the preceding six quarters. Annual growth slowed modestly but was still running at a healthy pace (5.6%). 

Macro (Re)view (27/2) | Concerns weigh on sentiment

There was a risk-off tone to the price action this week as investors remained concerned about AI prospects - despite solid earnings growth from Nvidia. The Treasury market rallied, with yields at both the front and long end of the curve were down by more than 10bps on the week. In FX, the USD gained against the JPY after the announcement of two dovish-leaning nominees to the BoJ and reservations expressed by PM Takaichi over rate hikes. Strong inflation data kept the AUD supported. 

A May rate hike by the RBA was priced to a near lock by markets after inflation data for January was firmer than expected. Headline inflation held at 3.8%yr in January - defying forecasts to ease to 3.7% - while core inflation lifted a touch from 3.3% to 3.4%yr (see here). Inflation sitting above the target band (2-3%) keeps the pressure on the RBA, though Governor Bullock did not say anything during this week's fireside chat to suggest its measured approach - with the next hike likely in May - was set for a re-think.  

A hike at the next meeting in March is probably an underpriced risk (around 15%), especially if next week's National Accounts (previewed here) deliver an upside surprise on GDP growth in the December quarter (expected at 0.5%q/q and 2%Y/Y), which would reinforce the RBA's concerns around capacity pressures. Additional inputs (public demand, inventories and trade) will sharpen estimates for GDP growth ahead of the National Accounts. Inputs this week were somewhat mixed: private sector construction work lifted solidly (see here) but business investment lost some momentum (see here).  

In the US, there were some signs of Fed hawkishness. Governor Waller said that if the upcoming labour market data were to indicate a rebound from a weak year in 2025 was in train - after the strong January report - he would lean towards keeping rates on hold; however, he balanced those views by indicating he remains somewhat unconvinced by the turnaround given volatility in the data. Similarly, Boston Fed President Collins said the labour market data was 'promising', while Chicago Fed President Goolsbee highlighted that inflation was 'not good enough' to justify cuts. 

Policymakers in the euro area and the UK were in the spotlight at their respective parliamentary appearances this week. ECB President Lagarde said the expectation that inflation will remain around the 2% target is keeping rates on hold. But there are risks to the inflation outlook, including the strength of the euro as well as uncertainty around global trade and policy. BoE Governor Bailey told the Treasury Committee that in his view a rate cut in March (expected by markets) was an 'open question' and depended on the incoming data. Bailey's vote is key. Last November he swung the majority to 5-4 in delivering a 25bps rate cut before reverting back to a hold in February.

Preview: Australian Q4 GDP

Australia's latest GDP growth figures will be published by the ABS today (1130 AEDT) in the December quarter National Accounts. Consensus expectations align closely with the RBA's forecasts for growth of around 0.8% in the quarter and 2.3% through the year - with risks to the upside. If realised, stronger-than-expected growth may reinforce the RBA's concerns around capacity pressures in the economy contributing to above-target inflation. Pricing for an RBA rate hike later this month is already on the rise, the odds increasing from around 10% to 30% following yesterday's comments from Governor Bullock that the March meeting is live. A rate hike to follow up the 25bps increase at the February meeting is fully priced by May. 

September quarter recap: Domestic demand accelerates 

Australian GDP growth moderated from 0.7% to 0.4% in the September quarter. However, that belied the fastest acceleration in domestic demand (1.2%) in more than 2 years, with headline growth weighed by the volatile trade and inventory components. Annual GDP growth firmed from 2% to 2.1%, remaining around the RBA's estimate of potential growth.  

The pick-up in domestic demand was led by business investment (3.4%) as capital expenditure on the construction and fit-out of data centres ramped up. Household consumption eased in the September quarter (0.5%), with discretionary purchases cooling (-0.2%) and spending on essentials lifting (1%). Public demand (1.1%) rebounded from recent weakness. Against this, inventories (-0.5ppt) and net exports (-0.1ppt) weighed on growth.   

December quarter preview: Momentum set to continue

The global backdrop continued to support the Australian economy, despite ongoing trade and geopolitical uncertainty. Growth across OECD economies was 0.3% in the December quarter and 1.7% through the year. In China, output growth remained solid in the quarter (1.2%) but had slowed through the past year as domestic demand softened. Global trade and inventories remained volatile in response to the tariffs imposed by the US Administration, but their overall impact on growth has been limited. 

Conditions in the domestic economy remained robust through the final quarter of 2025. The RBA's earlier easing cycle that delivered 75bps of rate cuts gained traction, supporting consumption and a buoyant housing market. The ABS's gauge of household spending accelerated by 0.9% in the quarter alongside the Black Friday sales and a stacked calendar of major sporting events and concerts. Housing prices nationally lifted by around 5% over the back half of the year, while housing credit growth was running at around 7% in annual terms by year-end, its fastest pace since late 2022. Business investment moderated, though that mainly reflected the timing of equipment purchases that surged in the previous quarter.   

Key dynamics in Q4

Household consumption — Rose at pace in the quarter, supported by increased spending in most consumption categories. Real income growth and RBA rate cuts look to have boosted discretionary spending during the Black Friday sales and at major events.  

Dwelling investment — Residential construction work continued to increase after accelerating in the previous quarter, signs that the RBA's easing cycle and rising housing prices were supporting this activity. New home building was the driver as alteration work slowed.

Business investment — Momentum in business investment was curtailed slightly as equipment spending slowed after surging in Q3; however, non-residential construction activity (including data centres and renewable energy projects) continued.

Public demand — Contributed 0.3ppt to quarterly growth. Government spending lifted by 0.9%, driven by state and local government expenditure. Public investment rose by 1%.   

Inventories — Added around 0.4ppt to growth in the quarter, delivered by contributions from both private (0.2ppt) and public sector inventories (0.2ppt).  

Net exports — Broadly neutral for growth, deducting just 0.1ppt. Imports rose 1.8% reflecting the strength of domestic demand, outpacing a 1.4% lift in exports.

Australian Capex 0.4% in Q4; 2025/26 investment plans $199bn

Australian private sector capital expenditure rose 0.4% in the December quarter, reaching a near 11-year high just short of $50bn. This was an upside surprise on expectations for a flat result, though the equipment component that feeds into calculations for quarterly GDP growth (due next week) declined (-1.7%). Investment in data centres helped to revive the capex cycle in 2025 and this is set to become a major theme in the next financial year. Initial estimates for the capex spend in 2026/27 are pressing $160bn, their highest since 2013/14.  

Private sector businesses increased their capital expenditure (investment spending) by 0.4% in the December quarter, according to today's publication by the ABS. This was well down from the surge in capex seen last quarter (6.4%) but above expectations for no growth. 

Spending on buildings and structures rose by 2.3% for the second quarter in succession, broadly aligning with the lift in non-residential construction activity reported yesterday (see here). Meanwhile, equipment spending pulled back by 1.7%. Strictly speaking, this will weigh on quarterly GDP growth - though the broader picture is positive, with equipment spending coming off its strongest quarterly increase since 2009 (11.2%), associated with the fit-out of data centres.

Data centres as well as aircraft purchases and renewable energy projects have all combined to spark the capex cycle. After a slow first half in 2025 (1%), capex accelerated by 6.8% through the back half of the year. This was supported by a significant ramp-up in equipment investment (0.2% to 9.2%), and a lift in buildings and structures (1.7% to 4.7%). 

Capex in the information media and telecommunications industry captures the surge in data centre investment. Over the past year, capex in this industry has risen by almost 40% (with equipment up 50% and buildings and structures up 30%). 

Today's publication also featured firms' latest capex plans - a hot topic in financial markets at present, particularly around the return on investment from very expensive AI-related projects. The 5th estimate of capex plans this financial year (2025/26) was $199.3bn, a 4.3% upgrade on estimate 4 from three months ago. That puts capex on track to rise by 8.6% compared with the 2024/25 financial year (full details around the composition of capex plans are shown in the capex intentions table above). 

The report also gave an early glimpse into the future as businesses provided the ABS with their first estimates of planned capex spending in 2026/27. All told, capex plans next financial year came in just shy of $160bn, their highest since the opening guess for 2013/14. Forecasts for capex spending in 2026/27 were around $112bn for the non-mining sector and $47bn in the mining sector.  

Focusing on the data centre impact, planned capex in the information media and telecommunications industry is at this stage forecast to be $20.1bn in 2026/27. That represents a 75% increase on capex plans from this industry just 12 months ago. For additional context, the ABS clocks capex by the industry at around $10bn at the halfway point in the current financial year. 

Australian construction activity -0.1% in Q4

Australian construction activity was broadly flat (-0.1%) in the December quarter, a large downside surprise on expectations for a 1.3% increase. But the news was more positive than the headline figure implies, with weakness in the public sector (-2.8%) hiding a pick-up in private sector activity (0.9%).

Construction activity weakened very modestly in the December quarter falling by 0.1%, slowing growth through the year to 3% from 3.9% previously. However, work done in the September quarter was revised to show a 0.1% rise, after initially being reported as a 0.7% fall. The key details were building work up 0.9% (including gains of 1% for residential work and 0.7% for the non-residential segment), weighed by a 1.3% contraction in engineering work. 

Across the past year, building work has picked up to rise by 8.1%. RBA easing in 2025 supported home building, while investment in data centres has seen non-residential activity accelerate. By contrast, the engineering segment has declined (-2.7%) as the large pipeline of public sector infrastructure projects that ramped up post Covid has started to cycle. 

Accordingly, those dynamic feed into the divergence between private sector activity (0.9%q/q, 6.5%Y/Y) and public sector work (-2.8%q/q, -5.8%Y/Y). Next week's National Accounts will show the public sector is still supporting the economy through government spending, but the investment side has rolled over. That leaves the private sector as the growth engine of the domestic economy. 

Encouragingly, private activity in residential construction lifted a further 1.1% in the December quarter following an acceleration in the previous quarter (4.6%), with output through the year running at a strong clip (7.7%). Residential construction will support growth in the December quarter, though to a lesser extent than in Q3. Looking ahead, the RBA hiking early in 2026 (and likely to tighten further) will become a headwind as the year progresses. 

Business investment was a key driver of growth in the September quarter, though today's data suggests that tapered into year-end (albeit capital expenditure data will provide a clear picture in tomorrow's release). Non-residential construction work moderated to a 0.8% rise after surging by 8% in the previous quarter, which was largely attributed to lumpy investment in data centres. 

Australian CPI 3.8% in January

Australian inflation failed to soften as markets expected, remaining above the RBA's target range (2-3%) early in the new year. Headline inflation (0.4% month-on-month) was unchanged at 3.8% for the 12 months through January, defying forecasts to ease to 3.7%. Meanwhile, core or trimmed mean inflation (0.3%m/m) lifted slightly from 3.3% to 3.4%yr. Markets are currently pricing in only a small chance (around 15%) of an RBA rate hike at its next meeting in March. Instead, the May meeting is seen as much more likely (around 90%) for the next cash rate increase to be delivered, once the key quarterly inflation figures are released in April. 

Headline inflation was 0.4% in the month of January, with a range of seasonal effects seeing it cool from a 1% pace in December. However, markets expected inflation to slow more sharply. As a result, annual inflation at 3.8% surprised slightly to the upside of expectations (3.7%). Core inflation was a little firmer in January (0.3%) than it was in December (0.2%), seeing the annual rate rise from 3.3% to 3.4% - also above expectations (3.3%). 

Late in 2024, headline inflation was 2.4%, around the midpoint of the RBA's target for 2-3% and core inflation (3.3%) was just above the top of the band. Over the past year or so, a range of factors have seen inflation rise again. These include electricity prices (32.2%yr) as government rebates have ended, while the cost of building new homes and a tight rental market has driven higher housing inflation (6.8%yr). Meanwhile, the RBA has been pushing the narrative that inflation has picked up because the economy and labour market have been a bit stronger than it expected through last year.   

Under the hood, there was a notable uptick in goods inflation to 1.3% month-on-month in January. At an annual rate, goods inflation rose from 3.4% to 3.8% - significantly higher than at the end of 2024 (0.8%), with electricity prices (as discussed) the driving factor. Services inflation fell in January (-0.7%), largely the result of seasonality in domestic holiday travel, easing the annual pace from 4.1% to 3.9%, a bit softer than 12 months ago (4.3%). But services inflation is still elevated and causing the RBA concern. Rents (3.9%) and medical services (4.2%) have been key pressure points through the past year.