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.
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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.
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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.
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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%).
