Australian Business Indicators Q3: inventories -0.9%

Australia's Business Indicators data delivered contrasting details for the key inputs that will feed into Wednesday's economic growth figures for the September quarter. Sales volumes - a gauge of domestic demand - rose at a respectable pace (0.5%), and wage incomes also recorded solid growth (1.5%) in a good sign for the labour market. However, inventories - the component that headlines the report - look likely to weigh on quarterly GDP growth (barring an offsetting contribution from public sector inventories in data due tomorrow). Meanwhile, business profits were materially weaker than expected.  

Sales volumes advanced by 0.5% in the September quarter following an upwardly revised rise of 0.7% in the June quarter (from an initial 0.5%). That equates to growth of 1.2% across the past two quarters - a clear sign of a recovery in domestic demand. The last time sales had this sort of momentum was three years ago, a period still very much driven by the pandemic recovery.     

As the chart below shows, sales in Q3 (green bars) rose in the vast majority of categories, following increases in Q2 (gold bars). However, sales growth generally slowed compared to Q2 - notably evident in discretionary demand categories, such as hospitality, arts and recreation, and retail.  

That backdrop of growing demand typically sees inventory levels fall. This was broadly the case in Q3, except that it was accentuated by a large decline in mining sector inventories (-4.8%). This may indicate overseas shipments picked up, but tomorrow's balance of payments data should shed more light on the matter. Overall, inventory levels fell by 0.9% compared to the previous quarter, a big downside surprise on market expectations for no change. Based on disclosed form, that suggests private non-farm inventories will deduct 0.3ppt from GDP growth in Q3. The total contribution to growth from inventories however also includes public sector inventories, and that data will come through tomorrow. 

Business profits disappointed in the quarter. On a headline basis, profits were flat (0%) in Q3 against expectations for a 1.5% rise; however, they fell by 1.3% after inventory valuation adjustments - this being a closer guide to what the National Accounts will report. Mining sector profits - often volatile from one quarter to the next - rose by just 0.2%, offsetting a 0.2% fall for the non-mining sector. All told, business profits are up 1.1% through the year, but they have fallen slightly (-0.8%) after inventory adjustment. The latter suggests that companies have been prepared to absorb some cost pressures within their profit margins, perhaps wary of the durability of the pick-up in demand they have seen. 

Wage incomes rose by 1.5% in the quarter, maintaining a similar pace through the past year or so. Annual growth firmed from 6% to 6.3%, its fastest since Q1 2024. Overall, this suggests labour market conditions still remain fairly robust, despite the unemployment rate having trended up since the start of the year. 

In the latest quarter, the fastest growth in wages was in the financial and insurance services industry (5.8%). The weakest was notably in professional services (-1%), possibly due to firms pausing hiring in that sector. 

Macro (Re)view (28/11) | On the rebound

A strong risk reversal occurred across broad markets this week. Equities rebounded from last week's falls, the US dollar declined, and government bond yields were lower - notably in the UK post the Budget; however, Australia saw yields rise following strong inflation data, and markets are now starting to price a hike as the next move from the RBA. 

In Australia, upside surprises in the October inflation report and expectations for a solid Q3 GDP growth outcome next week saw markets price out the chance of any further RBA cuts this cycle. Headline CPI rose to 3.8%yr (vs 3.6% exp) from 3.6%yr in September, while the core or trimmed mean measure firmed to 3.3%yr from 3.2%yr, defying forecasts to fall to 2.9%yr (reviewed here). Unwinding electricity rebates were the familiar culprit for higher headline inflation; however, the rise in core inflation and an uptick in services prices (3.9%yr from 3.5%yr) was consistent with the broad reacceleration of price pressures that has seen the RBA turn more cautious. A solid Australian GDP growth outcome of 0.6-0.7% in Q3 is expected next week, with full my full preview available here. That follows upbeat data on business investment (6.4%) - strongest quarterly rise since 2012 (see here) - and rising momentum in residential and non-residential construction activity (see here). 

Markets took the UK Budget in their stride, despite plans by the government to further raise near-term spending (£9bn) while delaying the tax increases (£26bn) to fund it for at least a couple of years. The DMO's remit for Gilt sales in 2025/26 has risen following the Budget, lifting by £4.6bn to £303.7bn - below the expected increase of £8.6bn in a Reuters poll. Meanwhile, the OBR determined that the government's fiscal headroom - the buffer against its mandate to return the budget to balance by 2029/30 - has increased from £10bn to £22bn. With those key market-relevant aspects being well received, pricing is weighted heavily (90%) towards the BoE cutting rates on December 18. 

Within the more granular detail, the Budget failed to bring forward policy measures to boost the outlook for the UK economy. The OBR effectively estimated the new measures (including welfare and energy bill relief) to be growth neutral, leaving the economy exposed to weaker productivity growth. Accordingly, the OBR lowered its forecast for GDP growth from 1.8% to 1.5%, on average, through to 2029/30. Energy bill assistance is expected to knock 0.3ppt off inflation next year to 2.5% before slowing to 2% - in line with the BoE's target - from 2027 onwards. 

Backlogged US retail sales data for September was weaker than expected and the Fed's Beige Book noted signs of labour market weakness. Headline sales fell short of the mark rising 0.2% in September (vs 0.4%), while core (0.1%) and control group sales (-0.1%) also turned in disappointing showings. The Beige Book in November reported 'weaker labour demand' in around half of the 12 reporting districts. Signs of the AI impact were highlighted as firms were generally looking at limiting headcounts and adjusting hours rather than responding to weaker demand with layoffs.

Preview: Australian Q3 GDP

Australia's September quarter National Accounts are due from the ABS this morning (3/12, 1130 AEDT). Growth in the domestic economy reaccelerated in the June quarter (0.6%) as household consumption turned back the clock with its strongest rise since late 2022. Encouragingly, this momentum looks to have continued in the September quarter, and the drivers of growth appear to have broadened. Real GDP growth of around 0.7% is expected, which would lift year-ended growth from 1.8% to 2.2% - above the RBA's forecast trajectory for 2% at the end of 2025. The expected result should reaffirm Australia's resilience to global and domestic headwinds; however, longer-term growth prospects remain susceptible if weakness in productivity persists.    

June quarter recap: Consumption revival drives growth 

Renewed strength in household consumption drove GDP growth to 0.6% in the June quarter, raising annual growth from 1.4% to 1.8%. Household consumption increased by 0.9% in the quarter (2%Y/Y) on the back of the fastest acceleration in discretionary spending (1.4%) in almost 3 years. Improving sentiment and rising real incomes appeared to be key factors. 

Lower inflation, fiscal support (Stage 3 tax cuts and energy rebates), and RBA rate cuts had all contributed to the strongest pace of real income growth (4.2%Y/Y) in several years. Dwelling investment continued to make headway (0.4%), up 4.8% through the year. That helped to offset weakness in business investment (0.3%Y/Y) that has been impacted by economic uncertainty and cost pressures. 

Led by household consumption, private demand (0.6%) remained the key driver of growth for a third straight quarter, with public demand (0.2%) continuing to slow. Public spending is still expanding solidly, but the investment pipeline has now peaked and is retracing as major projects reach completion or move towards later stages. 

September quarter preview: Recovery broadens 

Resilient growth outcomes have been evident in many advanced economies in Q3 amid trade and geopolitical uncertainties. Growth in the US was somewhat clouded by the government shutdown, but momentum through the first half of the year had been solid (0.8%). France and Germany drove the euro area to a slight uptick in Q3 growth (0.2%), but the UK slowed (0.1%). Declining exports saw growth contract in Japan (-0.4%). In China, trade underpinned growth (1.1%) as domestic demand weakened.   

Domestically, the consumption-driven rebound looks to have continued - albeit at a slower pace. In volume terms, household spending (excluding tobacco) moderated to a 0.4% increase on a post-sales pullback. Households may have also felt the pinch from fading electricity rebates and the broader reacceleration in inflationary pressures. That said, the RBA cut the cash rate further in August, and the effects of the earlier cuts are still playing through. 

This was notably evident in the housing market. Nationwide, housing prices were up more than 2% in the quarter to be more than 4% higher than a year earlier. Lending to the investor segment surged (17.6%) supported by demand for new and existing stock. Owner-occupier lending lifted solidly reaching 3½-year highs. After lagging in the upswing, residential construction activity rose at its fastest quarterly pace in almost 5 years. Business investment also found form elevating on strength in equipment investment. 

Key dynamics in Q3

Household consumption — Slowed from the strong gain in the June quarter but the recovery continued. Spending on essentials (food and health) were the key drivers, in contrast to the discretionary-led growth in Q2. 

Dwelling investment — Partial data indicated residential construction activity saw its fastest quarterly rise in several years. This was driven by accelerated activity in new home building, with support from alteration work.   

Business investment — Accelerated sharply in Q3 and will contribute strongly to growth. Technology-driven investment in data centres was a key theme, and non-residential construction also picked up. 

Public demand — Reaccelerated after a couple of soft quarters rising by 1.1% in Q3. Public spending lifted by 0.8%, with state and local governments the main driver. New investment rebounded to rise by 2.4%. 

Inventories — Set to deduct 0.6ppt from quarterly growth all told. Private nonfarm inventories and public inventories are each expected to weigh by 0.3ppt.  

Net exports — Import volumes rose 1.5% in Q3, driven by capital goods as business investment picked up. This outpaced a 1% lift in exports that was led by resources. Overall, net exports are set to deduct 0.1ppt from quarterly growth. 

Australian Capex 6.4% in Q3; 2025/26 investment plans $191bn

Australian business investment was significantly stronger than expected in the September quarter. Capital expenditure accelerated by 6.4% (in chain volume or real terms) to its highest level since early 2015 as firms ramped up investment in data centres and on aircraft. A modest 0.5% rise was all that was expected, after capex firmed 0.4% in the June quarter. Forward-looking investment plans for the 2025/26 financial year were upgraded sharply to $191bn in the latest estimate, an outcome at the top of the range of expectations.     

Capex by private sector firms advanced by 6.4% in the September quarter, its fastest quarterly rise since Q1 2012. That drove capex spending in the quarter ($49bn) to its highest level going back to the March quarter in 2015. Annual growth rose from 1.8% to 6.9%. 

    

Equipment and machinery surged at its fastest pace in more than 20 years (11.5%) backed by investment in data centres and aircraft. Meanwhile, buildings and structures lifted by 2.1%, driven by the non-mining sector (3.6%). 

At the forefront of the technology-driven investment surge has been the information media and telecommunications industry (40.7%q/q). Capex by the industry is up 70% over the year to the September quarter, and equipment investment has risen by nearly 150%.   

The other industries of note in Q3 ware transport, postal and warehousing (23.4%) on the back of aircraft purchases, and accommodation and food services (16%) driven by investment in facilities.  

Today's report also included firms' 4th estimates of expected capex in the current financial year, ending 30 June 2026. The aggregate figure put forward was $191bn. This was 9.4% above estimate 3 submitted in August and 7.6% above estimate 4 for the previous financial year. 

My expectations going into the report were for a figure of between $187-191bn, so the latest estimate is robust, especially given the prevailing economic and policy uncertainties often highlighted by firms in surveys. Non-mining investment is now anticipated to come in at $137bn, a 12.1% upgrade on estimate 3, while mining investment was raised by a modest 3.3% to $55bn.  

Australian construction activity -0.7% in Q3

A modest decline in Australian construction sector activity in the September quarter (-0.7%) belied the sharpest increase in building work (4%) in a decade. The engineering category (-5.8%) weighed on the headline figure, relating to a pullback from an earlier surge in the Northern Territory associated with resources sector projects.  

Construction sector activity was down 0.7% overall for the September quarter - a weaker than expected outcome (0.3%) - following a 2.9% rise in the June quarter (revised from 3%). The result in the latest quarter slowed annual growth in output to 2.9%, down from 4.5% previously. 

The key movements in the quarter were: engineering -5.8% (its largest decline in 7 years); building work 4% (strongest rise since Q1 2015), which includes residential sector work 4.2% (fastest since Q4 2020) and non-residential work 3.7% (sharpest lift in 7 quarters).    

Also demanding attention is the composition of growth between the private and public sector. Output by the public sector has slowed over the past year (-1.8%) as major projects have reached or neared completion, but activity lifted in the latest quarter by 2.7%, driven by engineering work (3.9%). Private sector work fell for the first time in 4 quarters (-2%) but had still risen solidly over the past year (4.8%) - standing in contrast to the public sector. 

Within the private sector, residential work posted a 4% increase in the quarter (7.9%Y/Y) - its sharpest rise in almost 5 years. A 4.4% rise in new home building (detached houses 5.8% and units 2.2%) was its fastest expansion in a single quarter since Q1 2015, while alterations also lifted by 1.4%. 

Activity in the non-residential segment done by the private sector rose 6.6%, outpacing in a single quarter its growth over the past four (5.5%). Investment in data centres is likely playing a role in this expansion. 

 

Meanwhile, private engineering activity saw a dramatic retracement (-13%), after accelerating in the June quarter (13.2%). Those sharp movements were driven by the accounting practices of the ABS associated with mining equipment in projects in the Northern Territory.  

Australian CPI 3.8% in October

Australian inflation rose more than expected in October, the debut release of full monthly CPI data from the ABS following its overhaul from quarterly prints. Market pricing for another RBA cut this easing cycle fell to around 33% after headline inflation rose 3.8%yr (vs 3.6% expected, prior 3.6%) and core or trimmed mean firmed to 3.3%yr (vs 2.9%, prior 3.2%).   

Source: ABS

Monthly headline inflation was flat in October (0%), down from 0.5% in September, but the annual rate rose from 3.6% to 3.8% - its fastest since Q2 2024 - on base effects. Annual inflation is up from recent low of 1.9%yr in June due largely to the impact of last year's energy bill rebates fading out. However, core inflation has also lifted - but more moderately - from a low of 2.8%yr in June to 3.3% currently (fastest since Q4 2024), indicating price pressures have firmed broadly across the basket. That has seen the RBA turn more cautious on further rate cuts, despite reduced labour market tightness.

The RBA will take its time to get used to the new monthly CPI data, which is noisier than the quarterly data that has always guided policy. For example, electricity prices actually fell 10.2% in October as households in NSW and the ACT received rebates from the extension of the federal government scheme. But because electricity prices fell by more in October 2024 (-12.3%), the annual rate lifted from 33.9% to 37.1% - a key factor that pushed up annual headline CPI. 

Source: ABS

Electricity prices also contributed towards lifting goods inflation from 3.7% to 3.8% at an annual rate. Services inflation ticked up to be running at 3.9%yr from 3.5%yr in September, with the key drivers including rents (4.2%), medical services (5.1%yr), and holiday travel (7.1%). 

Macro (Re)view (21/11) | In the balance

Uncertainty continued to hang over markets leading to another risk-off week. Equities were down sharply - strong results from Nvidia unable to quell concerns over stretched tech valuations - the USD rose and Treasuries were bid. A delayed US payrolls report was not convincing to prospects for a December Fed rate cut, though markets were buoyed by NY Fed President Williams saying there was scope for policy easing "in the near term".    

The overdue September payrolls report - delayed 7 weeks by the government shutdown - failed to provide clarity on US labour market conditions, the key factor to the Fed's December decision. Together with the Fed's October meeting minutes that cast more light on the divisions within the FOMC over the appropriateness of further easing, market pricing slipped below 50% for a December rate cut that was seen as a formality just 4 weeks ago. Nonfarm payrolls rose by 119k in September, well above expectations (51k) and the strongest gain since April. However, the waters were muddied as downward revisions to prior gains continued (-33k for July and August) and the unemployment rate lifted from 4.3% to 4.4% - caveated by a pick-up in labour force participation to 4-month highs (62.4%). Average hourly earnings growth meanwhile held at 3.8%yr. 

UK inflation slowed in October but was marginally higher than expected in headline terms at 3.6%yr (3.8% prior, 3.5% exp). Core inflation eased from 3.5% to 3.4%yr (as exp) and services prices beat to the downside at 4.5%yr (4.7% prior, 4.6% exp), both elements that markets latched onto in boosting pricing towards 90% for the BoE to cut rates in December. But that pricing was subsequently scaled back as the week progressed, leaving the outcome of the December meeting delicately poised ahead of next week's crucial budget. In the euro area, November's flash PMI was broadly unchanged at a 52.4 reading, consistent with moderate growth in economic activity. Despite trade and geopolitical headwinds, the euro area economy has outperformed expectations, reflected in the European Commission this week raising its forecast for GDP growth this year from 0.9% to 1.3%.   

Australian wages growth remained well contained rising by 0.8% in the September quarter, leaving the annual pace steady at 3.4% (see here). The quarterly rise was boosted by the minimum wage increase (3.5%), while new enterprise bargaining agreements continued to drive the divergence between public (0.9%q/q, 3.8%Y/Y) and private sector wages growth (0.7%q/q, 3.2%Y/Y). The latter slowed to lows since mid-2022 correlating with reduce tightness in the labour market. All told, there is no near-term threat from wages to worry the RBA in light of the acceleration in inflation in Q3. The RBA's November meeting minutes reaffirmed an extended hold on rates is the likely path forward.    

Australian Q3 Wage Price Index 0.8%; 3.4%yr

Australian wages growth came in right on expectations rising by 0.8% in the September quarter, holding the annual pace at 3.4%. Although broader inflationary pressures rose notably in the quarter, the temperature of wages is lukewarm at best. Private sector wages growth (3.2%) moderated to its slowest pace since mid-2022, outpaced by the public sector (3.8%) for the third quarter in succession. The RBA forecasts wages growth to slow to 3% by the middle of next year. Nothing in today's report should alter that outlook.  

Today's release of the Wage Price Index (WPI) - a quarterly measure of wage inflation in the domestic labour market - showed wages growth ticked along at moderate pace in the September quarter. This has been the case for about a year now. At the peak in late 2023, wages growth was pressing record highs for the index well into the 4s; however, since then, wages growth has slowed as labour market tightness has eased, and as lower inflation outcomes have been reflected in the wage-setting process. 

In the September quarter, the earlier decision by the Fair Work Commission (an independent statutory authority in Australia) to mandate at 3.5% increase to the national minimum wage started to flow through. This was below last year's 3.75% increase, and well down from the 5.75% rise determined in its 2023 decision. 

The overall effect of the FWC's 2025 decision gave a modest boost to wages growth in Q3, in line with that from its 2024 decision. Individual agreements and enterprise bargaining agreements - the other drivers of wages growth - also made equivalent contributions to a year ago. 

For private sector jobs, wages growth was 0.7% in the quarter, down from 0.8% in the June quarter. Annual growth eased from 3.4% to 3.2%, now at its slowest pace since the June quarter of 2022. Queensland is the state with the strongest private sector wages growth at 3.7%Y/Y. Switching back to the national perspective, even if end-of-financial-year bonuses are added in, wages growth only lifts to 3.7%Y/Y, on par with its pace 12 months ago.

Further analysis from the ABS found that 47% of private sector jobs saw a wage adjustment (either higher or lower) in the quarter, compared with 49% in Q3 last year. Of those jobs, the average pay rise in Q3 was 3.6%, marking a low since Q4 2021. 

 

In the public sector, although wages growth continued to slow at a quarterly pace coming in at 0.9%, the annual pace continued to rise as it lifted from 3.7% to 3.8% - its fastest since Q2 2024. Backdated pay rises and new state-based enterprise bargaining agreements have seen wages growth in the sector reaccelerate in recent quarters. The clear standout has been Western Australia where wages growth has accelerated by nearly 7% through the year.   

Today's report found that 82% of the rise in public sector wages growth this quarter was driven by state government jobs. 1 in 3 public sector jobs saw a wage adjustment in the latest quarter all told, with the average pay rise being 3.1%.     

From an industry perspective, the full details on wages growth are included in the summary table above. Using these figures, my estimates have wages growth in household services running at around 3.5%Y/Y, down from a peak of around 5% in late 2023. I estimate wages growth in the goods-related and business services segments to be in the low 3s. 

Preview: Wage Price Index Q3

Australia's Wage Price Index (WPI) for the September quarter is due this morning (1130 AEDT). Wages growth has slowed from the peaks of late 2023 amid easing labour market tightness and as lower inflation outcomes have been factored into wage-setting processes. The RBA's forecasts have wages growth remaining on an easing trajectory over the next few quarters. The latest decision from the Fair Work Commission to increase the national minimum wage by 3.5% will start to be reflected in today's report.

September quarter preview: Minimum wage rise a boost to wages growth 

In today's report, headline wages growth is expected to print at 0.8% in the September quarter, with estimates ranging from 0.7-1%. If consensus is met, the annual pace would ease from 3.4% to 3.3%. The September quarter is typically the strongest quarter of the year for wages growth, coinciding with annual wage reviews in the private sector and changes to the minimum wage and awards coming into effect. This year, the Fair Work Commission decided upon a 3.5% increase to the minimum wage, slightly softer than last year's 3.75% rise.

June quarter recap: Wages growth holds steady

The WPI increased by a solid 0.8% in the June quarter, holding the annual pace at an unchanged 3.4%. Wages growth has slowed since peaking in late 2023 (4.2%Y/Y) as tightness in the labour market has eased and inflation has cooled. The RBA went onto to cut the cash rate by 25bps at its August meeting - its third cut of the year - content that the labour market was not a source of inflationary risk; however, the Bank is cautious given unit labour costs remain elevated while productivity growth is relatively weak. 

Public sector wages growth was 1% in the June quarter, following a 1.1% rise in the March quarter. Backdated pay rises and new state enterprise bargaining agreements coming into effect played a key role boosting wages over the first half of the year. Annual growth firmed from 3.6% to 3.7%, outpacing the overall index and the private sector. In the private sector, a 0.8% quarterly rise saw annual wages growth tick up from 3.3% to 3.4%. This is down notably from a peak of 4.2% in late 2023 to early 2024.  

Macro (Re)view (14/11) | Recalibrating outlooks

US equities stabilised after last week's sell-off, supported by the end to the 43-day government shutdown - though concerns over elevated tech valuations remained. European equities rebounded, Asian markets mostly advanced; however, Australia's ASX 200 declined for the third straight week, now around 5% off its late-October highs. Dollar weakness broadened, with the DXY down more than 1% for the week. In fixed income, the gilt market once again became the focus - for all the wrong reasons - amid political uncertainty ahead of the November 26 budget.  

The hawkish repricing of the Australian rates outlook - set in motion by reaccelerating inflation in Q3, and the RBA hinting at an extended pause on the cash rate at 3.6% - continued this week. Employment rediscovered form rising by 42.2k in October, only the second beat on expectations (20k) in the past 6 months and the strongest result since April (full review here). It also outpaced growth in the labour force as the participation rate remained steady but elevated at 67%. As a result, the unemployment rate fell to 4.3%, reversing its shock rise to 4.5% in September - its highest level since late 2021. The swaps curve now implies just a 25% chance of another cut this cycle, down from two 25bps cuts that were fully priced in 4 weeks ago. 

The more hawkish rates outlook also reflects the strength in housing market conditions. Housing finance surged in the September quarter; new lending rose 9.6% in the quarter ($98bn) - fastest rise since mid-2021 - led by the investor segment (17.6%) (see here). A 6.4% lift in underlying loan volumes (141.5k) combined with rising housing prices to drive lending higher. The latter is clearly resonating with homeowners, a key factor that drove a 12.7% jump in consumer sentiment in November, lifting the Westpac-Melbourne Institute Index to its first outright optimistic reading (>100) since early 2022. In the business sector, the NAB Survey reported an improvement in sales and profitability in October, alongside easing cost pressures.

An end to the US government shutdown will start to see the data flow ramp up again from next week. The BLS announced it will publish the September nonfarm payrolls report (previously due October 3) on Thursday. However, reports suggest that the October series for payrolls and CPI are likely to go by the wayside. September payrolls will give the Fed a little more insight going into the December meeting, where sentiment towards a rate cut has waned. That was driven by comments this week from several Fed members that are openly opposing a December cut. 

In the UK, fiscal uncertainty ahead of the Autumn Budget (November 26) sparked renewed volatility in the gilt market. The FT reported that Chancellor Reeves was preparing to scrap income tax rises following less pessimistic forecasts for government revenue from the OBR. Estimates vary according to the reports, but Reeves would still need to implement spending cuts and/or tax increases to adhere to the UK's self-imposed fiscal rules and to meet existing spending promises, raising uncertainty over how that will be achieved. The malaise has also reduced expectations for the scale of further BoE easing, though two 25bps rate cuts are still priced in over the coming year. The first of those could come as early as December, after GDP growth fell short of consensus in Q3 at 0.1%q/q, 1.3%Y/Y and wages growth slowed to a 4.6%yr pace.