Macro (Re)view (19/12) | Central bank divergence in focus

Markets navigated a week heavy with event risk with relative calm. US and European equities lifted but Asia underpeformed. The USD found support despite soft data reaffirming expectations for further Fed rate cuts. An easing Fed sets up central bank divergence as one of the key themes as markets look ahead to 2026. This week, the Bank of England cut by 25bps but the Bank of Japan hiked by 25bps. The ECB held steady as it continued to indicate rates had floored for the cycle, and the Riksbank and Norges Bank were also unchanged. Domestically, speculation is starting to increase around the RBA hiking as early as the February meeting. 

US data slowly coming back online is supporting dovish pricing for two Fed rate cuts next year, with the labour market weakening and inflation slowing. Headline CPI eased from 3% to 2.7%yr, defying the 3.1% consensus while the core rate came in from 3% to 2.6%yr against expectations for no change. Cooling inflation reaffirms the Fed's focus on the employment side of its dual mandate, which showed renewed signs of weakness.    

November payrolls rose by 64k but only after estimates reported a 105k fall in October. There were also 33k of downward revisions to payrolls in August (-26k) and September (108k). Given the Fed's view that the data are overstating payrolls by some 60k per month, all indications are that employment has been weakening into year-end. 

The unemployment rate rose to 4.6% in November from 4.4% in September (no figure was posted for October), while the underemployment rate jumped from 8% to 8.7% - both measures touching highs back to 2021. That came as participation picked up to 62.5% and the prime age rate held at 83.7% - just 0.2ppt off cycle highs. 

A widely expected hold from the ECB and upgrades to the growth and inflation outlook reaffirmed the pre-meeting view in markets that the easing cycle has likely run its course. The key depo rate was left at 2%, unchanged since June after 8 cuts from mid-2024 halved it from a peak of 4%. Swaps pricing has rates remaining on hold well into next year, the most likely scenario according to a Reuters article quoting ECB sources - though further easing has not been ruled out amid an uncertain economic outlook. 

At the post-meeting press conference, ECB President Lagarde continued to describe policy settings as being 'in a good place', reflective of new forecasts that showed inflation is on track to stabilise around its 2% target. While the ECB lifted its inflation forecasts for 2026 to 1.9% in headline terms (from 1.7%) and 2.2% on an underlying basis (from 1.9%), it expects inflation to ease back in 2027 to 1.8% headline (from 1.9%) and 1.9% core (from 1.8%).

The uplift to the inflation outlook comes as the euro area economy has remained resilient to trade and geopolitical headlines, underpinned by services-led growth. Accordingly, the ECB also revamped the expected growth profile to 1.4% this year (from 1.2%), 1.2% in 2026 (from 1%) and 1.4% in 2027 (from 1.3%). President Lagarde also highlighted the effect of the labour market in supporting the economy, with the unemployment rate sitting near record lows.

In the UK, the BoE lowered rates by 25bps to 3.75%. The decision was clinched on a narrow 5-4 majority by the Monetary Policy Committee, after Governor Bailey switched his vote to support a cut. This was the 6th cut in the current easing cycle dating back to August last year. The statement maintained the guidance that rates were 'likely to continue on a gradual downward path' - though it went on to note in a new inclusion that 'judgements around further policy easing will become a closer call'. 

In his policy comments in the meeting minutes, Governor Bailey said there was 'scope' to cut further but there was now 'more limited space' to do so with rates closer to neutral. The overall tone of the meeting saw markets wind back pricing for further easing to around 1-2 rate cuts by May next year. Earlier in the week, 2-3 rate cuts were seen as likely after inflation data in November showed encouraging progress - headline CPI fell from 3.5% to 3.2%yr and core CPI slowed from 3.4% to 3.2%yr - while there were more signs of weakness in the labour market as employment continued to slide (-38k in November).

The Australian government released the mid-year update of its 2026/26 budget. MYEFO reported a slight reduction in forecast cumulative deficits to $143.2bn by 2028/29, down from earlier estimates of around $152bn. The improvement came on the back of significant revenue upgrades, but structural pressures and policy choices mean spending is set to continue rising. The AOFM revised its issuance target to $125bn for the current fiscal year ($62.5bn already complete), down from $150bn previously. My review of MYEFO here has more analysis. 

That brings Macro View to a close for the year. Merry Christmas and best wishes.

Australia MYEFO 2025/26: Revenue windfall narrows deficits

The mid-year update (MYEFO) of Budget 2025/26 was handed down by Federal Treasurer Jim Chalmers in Canberra today. Australia's fiscal outlook has improved modestly since late March when the government delivered the budget it took to the May election at which it was returned for a second term. A revenue windfall has helped reduce forecast deficits to $143.2bn over the 4 years to 2028/29 from around $152bn previously.  

According to MYEFO, government revenue is forecast to be notably stronger over the next 4 years than previously anticipated. Resilient economic conditions and elevated commodity prices are set to deliver the government a revenue boost, but spending is also expected to keep rising - reducing the impact of the windfall on the bottom line. All told, improvements to the deficit are a modest $5.4bn this year (-$36.8bn) and $8.4bn over the forward estimates to 2028/29 (-$143.2bn). That translates to deficits of just over 1% of GDP.     

The chart below illustrates the key dynamics at play. Resilient economic conditions and elevated commodity prices deliver a windfall of $41.3bn over the next 4 years (green bars). The bulk of that is driven by a $36bn upgrade from personal income and company tax. However, a higher take-up of government programs and increases to other expenses are set to push up government spending over the next 4 years by $35.1bn (yellow bars). Meanwhile, new policy decisions included in MYEFO - mainly around tightening spending on consultants and changes to the home batteries program - improve the bottom line by a net $2.2bn (grey bars).  

As is becoming increasingly well documented, the government is expanding its use of 'off budget' spending measures - the most notable recent example being the 20% reduction to student loans. Off budget measures are set to average $23.5bn per year over the forward estimates. As a result, the headline budget deficit (yellow line) is forecast to be considerably wider than the underlying deficit (green line).  

In historical terms, government revenue (receipts) shown in the yellow line in the chart below is projected to run at elevated levels, at around 25-26% of GDP for the next few years. However, MYEFO reaffirms the budget faces significant pressure from rising costs in several areas (debt interest, NDIS, defence, hospitals, medical benefits and the Child Care Subsidy), while spending restraint is proving politically difficult in the current climate. The effect of this is that government payments at around 26-27% of GDP are set to outpace revenue, locking in the forecast deficits discussed earlier.   

With a trajectory of forecast deficits, government net debt is projected to remain on the rise for the next few years. Net debt as a share of GDP is set to rise from 20.1% in the current financial year to 22.6% by 2028/29. 

The key economic forecasts compiled by Treasury that shape MYEFO have not shifted significantly since the Budget was tabled in March - though there are some notable changes. The main shift is in the inflation outlook, which has been revised higher following the hot Q3 CPI report (see here). Headline inflation was marked up 0.75ppt to 3.75% for 2025/26 and then by 0.25ppt to 2.75% in 2026/27. In addition, commodity prices are seen remaining higher for longer, boosting the terms of trade and nominal GDP in the current financial year. These are all key factors behind the forecast boost to government revenue. Meanwhile, although slightly faster employment growth is now expected, the unemployment rate is anticipated to be 0.25ppt higher through this financial year and next. 

Treasury has broadly retained its forecasts for global economic growth. The outlook for 3% world GDP growth in 2025 is the slowest since the early 1990s weighed by tariff-related factors; however, a modest recovery is set to take place from next year.  

Macro (Re)view (12/12) | Unconvincing convictions

It was a week of unconvincing moves across markets as a clear narrative failed to emerge from the key Fed meeting. Rates were cut by 25bps - and the forecasts for further easing were retained - but divisions on the FOMC and a void of data are creating uncertainty. Overall, the US curve steepened, though more hawkish rate expectations elsewhere - most notably in Australia and the BoC holding steady - meant the USD was softer. Tech and AI-related plays continued to weigh on equities. Key events next week include November payrolls (Tuesday) and CPI (Thursday) in the US, and policy meetings for the ECB, BoE (Thursday) and BoJ (Friday).  

Ongoing concerns over the US labour market saw the Fed's FOMC cut rates by a further 25bps this week to a 3.5%-3.75% range. This was the third cut in succession, with rates now down by 175bps across the easing cycle since September last year. The divisions of policymakers' views remained a key focus coming out of the meeting: Miran voted for a 50bps cut while two others (Goolsbee and Schmid) objected to any cut at all, raising uncertainty over the path for rates.  

However, the updated dot plot still implies one further rate cut in 2026 and 2027 as the median forecast, despite expectations for a more optimistic economic outlook. Stronger growth is now anticipated in 2026 (2.3% from 1.8%) and 2027 (2% from 1.9%), reflecting the resilience of the US economy - though the forecasts for inflation in 2026 were lowered (headline PCE 2.4% from 2.6%, core PCE 2.5% from 2.6%), as was the unemployment rate in 2027 (4.2% from 4.3%). 

At the post-meeting press conference, Chair Powell said the current labour market conditions - higher unemployment rate and slowing employment - warranted easing policy. This is reinforced by the view that payrolls data are overstating employment gains by around 60k per month. Although inflation remains elevated to the 2% target, the FOMC's interpretation is that the overshoot is due largely to trade tariffs. This is seen as having a short-term impact on prices rather than sparking a renewed inflationary episode.   

Attention in the euro area turns to next week's ECB meeting with the Governing Council firmly expected to remain on hold, while in the UK the BoE is likely to cut rates by 25bps. Speaking with FT in London, ECB President Lagarde reaffimed rates remained 'in a good place' and that growth and inflation forecasts could be revised higher next week - perhaps a quiet nod to markets that have recently priced out any further rate cuts. 

The BoE's decision seemingly hinges on Governor Bailey switching his vote to support a cut, after the MPC was split 5-4 in favour of holding last time out. The missing piece of the puzzle then was the UK Budget, but the measures subsequently handed down by Chancellor Reeves in late November failed to alter a subdued growth outlook, proving no hurdle to a rate cut.    

In Australia, the RBA left the cash rate at 3.6% in a hawkish hold as the policy board highlighted increased risks around the inflation outlook (reviewed here). As such, the decision statement and Governor Bullock's press conference effectively communicated the easing cycle had run its course, and markets took this as a green light to price in 50bps of rate hikes in 2026.

However, a weak labour force report for November has given markets something to think about over the summer break. Employment fell by 21.3k in the month, posting its weakest result in 9 months to defy expectations for a 20k rise (reviewed here). The unemployment rate clung on to remain unchanged at 4.3%, but that was only due to a decline in labour force participation from 66.9% to 66.7%.

Australian employment -21.3k in November; unemployment rate 4.3%

A weak Australian labour market report for November has given markets something to think about following their hawkish repricing of the RBA rates outlook for two rate hikes in 2026.  Employment fell by 21.3k in the month, defying expectations for a 20k rise, with falling labour force participation (66.7%) the only variable that prevented the unemployment rate (4.3%) from rising.  

By the numbers | November 

• Employment posted its weakest result in 9 months falling by 21.3k in November, a large miss on expectations for a 20k rise. This followed a 41.1k increase in October, revised from 42.2k.  
• Australia's unemployment rate was unchanged at 4.3% against expectations for a rise to 4.4%. However, the underemployment rate increased from 5.7% to 6.2% (13-month high), pushing up labour force underutilisation from 10.1% to 10.5% - its highest reading since August last year.  
• Labour force participation declined from 66.9% in October (revised from 67%) to 66.7% in November. The employment to population ratio fell from 64% to 63.8%.    
• Hours worked stalled in November (0%) following gains of 0.5% in September and 0.4% in October. Annual growth fell from 2.1% to 1.2%. 

The details | November 

The upbeat result for employment in October (41.1k) has proved short lived, falling back by 21.3k in November. This was the 4th decline in monthly employment this year and its weakest result since last February (-62.2k). Full time employment fell by 56.5k, giving back all of October's gain (53.6k); however, part time employment rose by 35.2k, more than rebounding its 12.5k decline last time out. Employment gains over the 3 months to November averaged just 10.3k.    

Despite employment falling (-21.3k), the unemployment rate was able to remain unmoved at 4.3%. This was due to a surprisingly large fall in the participation rate from 66.9% to 66.7% that saw 23.4k people exit the labour force - the largest reduction seen in 9 months. Meanwhile, the employment to population ratio - the share of people in work - eased from 64% to 63.8%.   

The real weakness was beneath the surface. The broader underemployment rate (including unemployed workers and employed workers wanting more hours) rose sharply from 5.7% in October to 6.2% in November, a 13-month high and more reflective of the weakness in employment. This drove total labour force underutilisation (combining unemployment and underemployment) to a 15-month high at 10.5% from 10.1% previously. 

Hours worked slowed to the point of stalling (0%) in November, coming off the back of consecutive gains in September (0.5%) and October (0.4%). Over the year, hours worked lifted by 1.2% - but that has been heavily driven by part time workers (4.5%Y/Y) with growth in full time hours subdued (0.6%Y/Y).  

In summary | November 

Today's report continued the run of volatile labour force prints, making the underlying conditions hard to read with any precision. What is clear is that employment growth has slowed through the past year, outpaced by growth in the labour force. This dynamic has put upward pressure on the unemployment rate, though at 4.3% it still remains at a historically low level. 

Preview: Labour Force Survey — November

Today's Australian labour force survey for November (due 1130 AEDT) follows a hawkish RBA meeting on Tuesday that effectively signalled the end of the easing cycle. The policy focus remains on the inflation side of the mandate, with labour market conditions still assessed to be broadly consistent with the RBA's full employment objective - despite the unemployment rate drifting higher this year. Markets go into today's report - the final major datapoint on the local calendar for the year - pricing in around of 50bps of RBA hikes in 2026; however, a weak report has the power to curtail some of that hawkish outlook.    

November preview: Remaining on the fence 

A moderate 20k rise in employment is expected in November, with estimates ranging from 10 to 40k. Employment is coming off a net gain of 42.2k in October - only the second upside surprise relative to consensus since April. With slower employment growth expected, the unemployment rate is forecast to lift from 4.3% to 4.4% (range: 4.2-4.4%). 

Monthly reports have been unusually volatile of late, so markets have tended to stay on the fence. This has seen employment forecasts coming in consistently around the 20k mark. Year to date, employment has lifted by an average of 16k per month, but that has not matched pace with growth in the labour force, averaging 22.5k per month. The unemployment rate has trended higher through the year on this dynamic, though it still remains at low levels.   

October recap: Employment rises as a 6-month high  

Employment posted its strongest outcome in 6 months rising by 42.2k in October, more than double the 20k consensus. The full-time segment surged 55.3k to account for all of the headline gain, with part-time employment falling 13.1k. 

With employment rising strongly and the labour force participation rate holding at 67%, the unemployment rate fell back to 4.3% - reversing its rise to 4.5% in September. In addition, the underemployment rate fell from 5.9% to 5.7%, seeing total labour force underutilisation tighten from 10.4% to 10%. 

Total hours worked rose by 0.5% for the second month in succession, slightly outpacing the rise in employment (0.3%). Both the full time (0.5%) and part time segments (0.7%) saw hours worked advance. Annual growth in total hours lifted from 1.4% to 2.1%.  

RBA extends hold in December

The RBA left the cash rate at 3.6% for the third meeting in succession, signing off for 2025 with a hawkish tilt that effectively signals the end of the line for the easing cycle. The hot September quarter CPI report continues to reverberate through the RBA, with inflation risks now 'tilted to the upside'. Strength in the economy and labour market has also raised uncertainty over the restrictiveness of interest rate settings heading into 2026. A total of 75bps of rate cuts were delivered through the year - the full effects of which are yet to play out. Governor Bullock said at the post-meeting press conference the likely outlook for policy was either an extended pause or higher rates. Markets are pricing in a 25bps hike by next June with a follow-up hike by September - a significant hawkish repricing from expectations for one further 25bps rate cut after the previous meeting in November.   

Today's statement and press conference made clear that inflation is still driving monetary policy. With inflation reaccelerating in Q3, the RBA is waiting on additional data - the key question needing to be confirmed is whether one-off factors (including electricity rebates and other administered prices) were mostly responsible or if it more accurately reflected the underlying supply/demand balance in the economy. It is clear that the quarterly CPI (next due late January) is the key input for policy decisions, with the ABS having only just pivoted to the new monthly series. 

Given the rise in inflation and the pick-up in economic activity, with domestic demand rising strongly in Q3 (1.2%), the statement noted uncertainty around 'the extent to which monetary policy remains restrictive'. Labour market conditions continue to be assessed as being on the tight side, and there remains caution around the easing in wages growth given that unit labour costs remain at elevated rates. 

As the RBA now heads into its summer break, it will be closely watching the incoming data as well as developments offshore and in the markets. This will all feed into the RBA's next forecast round. The next RBA monetary policy meeting and the first in 2026 is on February 2. 

Preview: RBA December meeting

The RBA looks set to sign off for 2025 with a hawkish hold, leaving the cash rate at 3.6%. Incoming data has driven a hawkish repricing of the rates outlook in Australia to the point where a rate hike in the second half of 2026 is now seen as the RBA's most likely next move. That compares to expectations for one further rate cut after the November meeting. In light of this, a hawkish surprise from the RBA seems an unlikely scenario. The main question is whether the tone of the decision statement and Governor Bullock's press conference supports the hawkish repricing that has taken place. 

Last time out in November, the RBA's decision to hold was a straightforward one. The RBA raised its inflation forecasts after CPI in the September quarter rose to 3.8%Y/Y in headline terms and 3.3%Y/Y on a trimmed mean or core basis - material upside surprises. However, Governor Bullock's post-meeting comments were balanced enough for markets to still have an additional rate cut priced in to round out the easing cycle. Data on both sides of the RBA's dual mandate (2-3% inflation and full employment) has since altered that view. 

On inflation, headline CPI was clocked in the new monthly data series rising from 3.6% to 3.8%Y/Y in October, with the trimmed mean firming from 3.2% to 3.3%Y/Y. Although temporary factors (electricity prices, travel costs and fuel) are pushing up headline inflation, the RBA has also noted upward pressure from areas such as home building costs and in services. In October services inflation lifted from 3.5% to 3.9%Y/Y.  

An encouraging labour market report in October saw employment reaccelerate (42.2k) at a 6-month high, seeing the unemployment rate fall from 4.5% to 4.3%. The unemployment rate has trended higher through the year; however, it still remains at a level the RBA sees as consistent with its full employment mandate. Those conditions are currently generating wages growth of 3.4%Y/Y as of the September quarter - a solid pace without posing upside risks to inflation. 

Meanwhile, last week's National Accounts were stronger than they looked - despite quarterly GDP growth slowing to 0.4% (2.1%Y/Y). Beneath the hood, domestic demand rose 1.2% in the September quarter - fastest rise since Q2 2023 - on broad-based gains across consumption, investment and in the public sector. Meanwhile, household spending made a strong start to the December quarter surging by 1.3% in October.  

All in all, expect the RBA to remain on hold on the basis of the incoming data since the November meeting. In the post-meeting press conference, Governor Bullock will likely keep to her usual script by steering clear of validating any particular rate path, stressing optionality to respond to the data is key.

Macro (Re)view (5/12) | RBA outlook shifts

Equities markets mostly made modest gains, adding to last week's rally - though higher yields at the longer end of the curve were a headwind. Pro-cyclical currencies (EUR and AUD) rose against the US dollar, while the JPY strengthened on signals the BoJ is preparing to hike later this month. Next's week's Fed meeting shapes as the key risk event for markets heading into year-end. 

Expectations are firmly set on the Fed cutting by 25bps next week. But with inflation remaining elevated to the 2% target, the Fed could be non-committal on further cuts - somewhat of a risk for markets pricing in 100bps of additional easing. Backward-looking inflation data for September released late in the week matched consensus: the PCE deflator was 0.3%m/m and 2.8%Y/Y (from 2.7%), while the Fed's preferred core PCE measure was 0.2%m/m and 2.8%Y/Y (from 2.9%). On the other hand, the same report showed spending lacked punch in September slowing to 0.3%m/m in nominal terms (from 0.6%) and stalling (0%m/m) on a real basis. Softer consumption saw the Atlanta Fed model downgrade its estimate for Q3 GDP growth from 3.8% to 3.5%.  

Euro area inflation data for November likely keeps the ECB in a holding pattern. Headline inflation ticked up from 2.1% to 2.2%Y/Y and the core rate was steady at 2.4%Y/Y. Part of the ECB's caution to cut further relates to elevated services inflation, which lifted from 3.4% to 3.5%Y/Y. The economic backdrop in the bloc has consistently surprised with its resilience throughout the year, and that was reflected in Q3 growth being revised up to 0.3%, with growth through the year at 1.4%. 

In Australia, markets have signaled the end of the RBA's easing cycle ahead of next week's meeting, now pricing in a rate hike as the next move, likely in the second half of 2026. The hawkish repricing followed household spending accelerating by 1.3% in October - its fastest rise in more than 18 months - while GDP growth in the September quarter of 0.4% was stronger than it looked despite missing expectations (0.7%). Annual growth firmed to 2.1% - already above the RBA's year-end forecast for 2%. The rates curve points to the cash rate (3.6%) staying flat until well into next year amid renewed inflationary pressures, still-robust labour market conditions and a resilient domestic growth backdrop - dynamics that are eventually expected to see the RBA tighten policy. 

Household spending rose 1.3% in October - sharply more than expected (0.6%) - with early Black Friday sales and major events (live sport and concerts) driving a reacceleration in discretionary spending (1.6%) after a soft Q3. Real GDP growth slowed to 0.4% in the September quarter from 0.7% in the June quarter - partly due to softer household consumption (0.5%) as discretionary demand pulled back (-0.2%) - though it was inventories (-0.5ppt) and net exports (-0.1ppt) that weighed most heavily. 

Excluding those volatile components, domestic demand - a more accurate gauge of the underlying momentum in the economy - lifted by 1.2%, its strongest rise since Q2 2023. That included the household consumption gain (0.5%), while business investment picked up strongly (3.4%) on AI and cloud capabilities. Meanwhile, renewed strength in public demand (1.1%) and support from dwelling investment (1.8%) ensured the pick-up in domestic demand was broadly based. In other news from Australia, monthly data for October showed a 6.4% fall in dwelling approvals and a wider trade surplus of $4.4bn. Meanwhile, the current account deficit was broadly unchanged at a little above 2% of GDP in Q3.

Australia's trade surplus $4.4bn in October

Australia's goods trade surplus widened to $4.4bn in October from $3.7bn in September, slighty missing expectations for a $4.5bn surplus. Exports rose 3.4% in the month reaching a 2-year high. This outpaced a 2% rise in imports.     

The trade surplus was $4.4bn in October, averaging $3.1bn across the past 3 months. The 3-month average marked a low going back to September 2018, having fallen from $4.8bn 12 months ago. The Q3 balance of payments data published earlier this week (see here) highlighted that import spending has been steadily climbing while export revenue has been subject to volatility in commodity prices. That has seen trade surpluses track a declining trajectory. 

Exports lifted by 3.4% in October to $46bn, their highest level in 2 years. The non-monetary gold category continued to surge (14.2%), reflecting elevated prices on strong safe-haven demand for the commodity. The value of non-monetary gold exports is up 74% over the year. Meanwhile, non-rural goods rose 2.1% on the back of gains in iron ore (2.3%) and LNG (4.9%). Rural goods advanced 0.9%. 

Import spending rose for the third month in succession with a 2% gain in October. Annual growth advanced from 11.2% to 13.6%, its fastest pace since the start of 2023. As with exports, non-monetary gold was the key movement for imports rising by 80% in the month to record highs. Consumption goods increased by 1.6%, while capital goods pulled back from recent strength - highlighted by the surge in business investment in the Q3 National Accounts (see here) - falling 5.5% in the month.   

Australian household spending rises 1.3% in October

Australian household spending surged by 1.3% in October, its fastest rise since the start of 2024 and well above the expected increase of 0.6%. Sales and major events saw discretionary spending lift sharply (1.6%), making a strong start to the quarter after yesterday's National Accounts reported a pullback in Q3 (see here). Markets do not expect any further RBA rate cuts and have begun pricing in a rate hike late next year. 

Household spending lifted by 1.3% in October ($78.4bn), accelerating from a 0.3% rise in September. Annual growth firmed to a 25-month high of 5.6% from 5.1% previously. The overall rise in spending was broadly based. The main dynamic was discretionary spending surging to a 1.6% rise for the month, its fastest gain since January 2024. Meanwhile, non-discretionary spending rose by 0.8%, matching its gain from September. The composition of growth remained driven by goods, which rose by its most (1.7%) since September 2023, outpacing services (0.8%).     

As the chart (below) shows, all categories contributed to pushing up spending in October. Sales events supported growth in clothing and footwear (3.5%) and furnishings and household equipment (3%). Major sporting events and concerts drove the recreation and culture category (1%), leading to associated gains at hotels, cafes and restaurants (2.2%). Alcoholic beverages and tobacco saw its first rise in 11 months (1.8%). Smaller gains were posted in the health (0.4%) and transport categories (0.3%).         

Household consumption growth slowed in the September quarter, but that looks to be temporary given the strength of the October report. As highlighted in my review of the National Accounts, a rising saving rate and solid real income growth bode well for the spending outlook. While further RBA rate cuts look to be off the table, the full effects of the 75bps of cuts delivered this year are still cycling through the economy. 

In review | Australian Q3 GDP: Domestic demand accelerates

The Australian economy slowed in the September quarter to 0.4% from 0.7% in the June quarter, disappointing expectations (0.7%). However, that belied an acceleration in domestic demand (1.2%) - more reflective of the underlying momentum in the economy - with headline growth weighed by inventories and net exports. Economic growth was 2.1% through the year, up from a revised 2% previously, already slightly above the RBA's end-2025 forecast (2%). 

Similar to Australia, growth in many advanced economies has been resilient despite headwinds from trade and geopolitical uncertainties. Growth in the US was solid over the first half of the year (0.8%) before being impacted by the government shutdown in Q3. The euro area saw a slight rise in Q3 (0.2%) driven by France and Germany; however, the UK slowed (0.1%). Trade had varying effects on economies in Asia, with growth advancing in China (1.1%) but contracting in Japan (-0.4%).       

The slowdown in quarterly headline growth in Australia can largely be looked through given it was driven by inventories (-0.5ppt) and net exports (-0.1ppt), both volatile components. Underlying growth was stronger than the 0.4% rise in real GDP implies as domestic demand rose at its fastest pace (1.2%) since Q2 2023. All components of domestic demand contributed to its increase, notably business investment that surged (3.4%) on technology-driven capital expenditure on data centres.   

Another key theme is that hand-off from the public to the private sector as the main driver of growth in Australia has been smoother than anticipated. Private demand (1.2%q/q) rose by 3.1% through the year, well up from a 0.6% pace for the year to Q3 2024. That pick has coincided with public demand growth (1.1%q/q) slowing from 4.9%Y/Y to 1.3%Y/Y currently.  

Weaker aspects of the National Accounts included subdued growth in productivity (0.7%Y/Y) and GDP in per capita terms (0.4%Y/Y). This continues to pose downside risks to longer-term growth prospects in Australia. However, the current momentum of growth is solid. With the labour market remaining robust (despite a higher unemployment rate), and after the reemergence of inflationary pressures in Q3, the RBA is likely to reaffirm its on-hold stance at next week's meeting.  

— — —

National Accounts — Q3 | Expenditure: GDP (E) 0.5%q/q, 2%Y/Y

Household consumption (0.5%q/q, 2.5%Y/Y) — Household consumption growth slowed to 0.5% in the September quarter following the 0.9% acceleration in the June quarter - its fastest rise since late 2022. Annual growth, however, lifted from 2.1% to 2.5%. 

The slowdown in Q3 was driven by a post-sales pullback in discretionary consumption (-0.2%), after it advanced strongly in Q2 (1.5%) supported by the extended Easter holiday period and end of financial year discounting. Meanwhile, consumption of essentials saw their fastest rise since late 2023 (1%). This profile and continued weakness in consumer sentiment suggests households remain cautious. 

That lingering caution is reflected in a saving rate that moved up from 6% to 6.4%, continuing its uptrend from very low levels over the past couple of years. However, increased saving combined with positive income dynamics bodes well for future consumption. Real disposable incomes managed to lift in Q3 (0.9%), despite renewed inflationary pressures (rising 0.9%q/q and 3%Y/Y according to the household consumption deflator). In annual terms, real disposable incomes rose at a healthy 3.9% pace, albeit down from 5.1% in the June quarter on base effects. A range of factors have supported real incomes including lower inflation; robust labour market conditions; Stage 3 tax cuts; and the RBA's easing cycle.   

Dwelling investment (1.8%q/q, 6.5%Y/Y) — Rose by 1.8% in Q3, lifting growth over the year from 5.6% to 6.5%. New home building activity was the key driver rising 2.6% to post its fastest quarterly gain since Q1 2021. This was supported by a 0.5% lift in alteration work. The sector has found form over the past year, with activity rising alongside the RBA's easing cycle. Meanwhile the capacity and cost pressures that constrained activity to a significant extent coming out of the pandemic have reduced.       

Business investment (3.4%q/q, 3.8%Y/Y) — New business investment accelerated by 3.4% in the quarter and 3.8% through the year, swinging from -0.6% previously. This was the strongest quarterly growth in business investment since early 2021 during the pandemic recovery, and the fastest in 8 years prior to that. Technology-driven investment in data centres to support AI and cloud computing capabilities saw machinery and equipment spending surge by 7.5%, its largest rise in 11 years excluding the pandemic. Growth in intellectual property products (2.4%) and cultivated biological resources (3.1%) picked up in Q3. Non-dwelling construction remained subdued with a 0.5% lift for the quarter. 

Public demand (1.1%q/q, 1.3%Y/Y) — Posted its strongest outturn in a year rising by 1.1% in the September quarter. Government expenditure rose by 0.8%, driven by state and local government spending on health and education portfolios. Public investment (adjusted for 2nd hand asset transfers) rose by 2.4%, but that followed declines in each of the previous three quarters. The public infrastructure pipeline has peaked and projects underway are moving towards completion. That has weighed on public demand over the past year; annual growth has slowed over the period from 4.9% to 1.3% currently. 

Inventories (-0.5ppt in Q3, -0.4ppt yr) — The change in inventories from Q3 (-$1.9bn) to Q2 ($1.7bn) produced its largest drag on quarterly growth (-0.5ppt) since Q2 2023. Non-farm inventory levels fell significantly as production in the mining sector declined, while robust domestic demand resulted in a drawdown on retail inventories. Public sector inventories also declined. 

Net exports (-0.1ppt in Q3, -0.1ppt yr) — Weighed very modestly on growth in the quarter (-0.1ppt) as exports (1%) were outpaced by imports (1.5%). Australia has been relatively less impacted by the volatility and uncertainty in global trade than many other countries following the US Administration's new tariff regime. 

Exports lifted 1% as goods advanced (1.3%) on the back of coal rebounding (6.9%) from declines in the past two quarters. Services were flat in the quarter but are up sharply over the year (9.2%), with the large number of overseas arrivals boosting the tourism and education sectors. A 1.5% rise in imports in Q3 was underpinned by the acceleration in business investment discussed above. This saw capital goods surge 6.7%, its strongest rise since the pandemic recovery in 2020 and before that Q1 2018. Services imports were soft (-0.2%) after a 3.3% rise in Q2.  

— — —

National Accounts — Q3 | Incomes: GDP (I) 0.3%q/q, 2%Y/Y 

The GDP income measure lifted 0.3% quarter-on-quarter, down from 0.8% in the June quarter; however, year-ended growth lifted from 1.8% to 2%. Wage incomes continued to lift solidly, indicative of a labour markets that remains in robust shape - despite the unemployment rate trending higher since the start of the year. The compensation of employees was up by 1.7% in the quarter to be 7.1% higher through the year, lifting from 6.7% previously. The public sector wage bill (2.2%) outpaced the private sector (1.6%) in Q3, driven by state-based enterprise bargaining agreements coming into effect. In the private sector, wages were supported by redundancies and bonuses in financial and insurance services. 

Company profits increased by 1.5% in Q3, while a base effect swung annual growth from -2.7% to 2.2%. Private non-financial corporations saw their strongest quarter since Q1 2024, with profits rising by 1% (0.9%Y/Y). A key contributor to this was the mining sector, which benefitted from higher coal and iron ore prices. Profits for financial corporations rose 2.6% in the quarter - fastest gain in 3 years - and 8.8% over the year, supported increased loan activity and higher lending margins. Meanwhile, gross mixed income (small company profits) rebounded from a decline in the previous quarter to rise by 1.1% in Q3 and 5.5% through the year. 

— — —

National Accounts — Q3 | Production: GDP (P) 0.4%q/q, 2.2%Y/Y

The GDP production estimate was 0.4% in the September quarter, with annual growth firming from 1.9% to 2.2%. In the goods sector, output rose 0.3% following a 1.2% lift in Q2, with annual growth up from 0.8% to 1.4%. Goods distribution led the way rising 0.6%q/q and 4%Y/Y. International travel boosted the transport industry (1.6%), and improving consumer demand lifted retail (0.4%). Output in goods production was broadly flat (0.1%); reduced output weighed on mining (1.8%) but that was offset by gains across construction, utilities, and manufacturing.   

For services industries overall, production increased by 0.4% in Q3 to be up 2.2% over the year. Household services expanded by 0.6% in the quarter (2.8%Y/Y). This was driven by health care (0.7%) and arts and recreation (0.7%). Business services saw a 0.3% lift, with financial and insurance services (1.6%) and rental, hiring and real estate services (1.6%) the key areas of strength. That was moderated by weakness in professional services (-1.9%).