Australian GDP growth 0.4% in Q3

Australian economic growth slowed to 0.4% in the September quarter, defying expectations to match its 0.7% pace in the June quarter. The outcome is stronger than today's miss implies. Domestic demand accelerated at its fastest pace since Q2 2023 (1.2%), with inventories (-0.5ppt) and net exports (-0.1pt) weighing on the headline growth rate. Year-ended growth firmed to 2.1% from a revised 2% (1.8% prior) - already above the RBA's end-2025 forecast of 2%. This should reaffirm the RBA's on-hold stance at next week's meeting.    

After lifting to 0.7% in the previous quarter (revised from 0.6%), economic growth softened to 0.4% in the latest quarter. Despite the weaker outcome this quarter, growth was more broadly driven than in the June quarter that relied entirely upon a sales-driven boost to household consumption (0.9%). With discretionary spending pulling back (-0.2%), household consumption slowed to 0.5%. However, business investment (3.4%) rose at its fastest pace since the pandemic rebound in 2021 as firms ramped up spending on data centres, while dwelling investment (1.8%) was underpinned by the strongest lift in home building activity in 2 years. Renewed strength in public demand (1.1%) was also a key growth driver. That left inventories (-0.5ppt) and net exports (-0.1ppt) - both swing factors - holding back growth.  

The pick-up in domestic demand, and its broad-based composition, is a key theme from the September quarter National Accounts. Another is the resurgence in private demand, inverting from a year ago when public demand was the dominant driver. Over the past year, private demand rose from 0.6%Y/Y to 3.1%Y/Y, taking up the running as public demand slowed from 4.9%Y/Y to 1.3%Y/Y currently. 

More to come. 

Australian dwelling approvals fall 6.4% in October

Australian dwelling approvals fell by 6.4% for the month in October (15.8k), slightly worse than the expected decline of 5%. The result reversed some of the 11.1% rise in September (revised from 12%), the only gain in approvals in the past 4 months. Approvals remain at low levels despite supportive macro factors.   

Approvals nationally declined by 6.4% to 15.8k in October, down 1.8% on a year earlier. This, however, followed a large rise in the previous month of 11.1%. In October, both major dwelling types recorded declines: house approvals fell 2% to 9.4k (following a 4% rise in September), and unit approvals inverted 12.1% to 6.1k (after surging 22.2% in the prior month). 

Over the past 3 months, dwelling approvals averaged around 16k, with house approvals running at 9.4k and units at 6.6k - all low levels relative to previous cycles. The RBA's earlier tightening cycle as well as capacity and cost pressures have been headwinds; however, there are also fundamentals that should be supporting additional housing construction, including RBA rate cuts, rising housing prices and population growth. 

House approvals were weighed by weakness in New South Wales (-0.2%), Victoria (-7.8%), and South Australia (-2.3%). Gains came through in Queensland (1.7%) and Western Australia (2%).

In the unit segment, a reversal in the volatile high-rise category drove the decline in approvals in October. That was despite the low-rise and townhouse categories seeing some uplift. Unit approvals declined heavily in New South Wales, Victoria and Queensland.   

Australia Current Account -$16.6bn in Q3; net exports -0.1ppt

Australia's current account deficit widened to $16.6bn in the September quarter (-$13bn expected) while deficits in recent quarters swelled following revisions. Over the past couple of years, export revenue has been affected by volatility in commodity prices while import spending has been rising. This has seen the trade surplus narrow significantly from elevated levels, falling to a 7-year low ($2.5bn) in the quarter. Import volumes (1.5%) outpaced growth in exports (1%) in Q3, with net exports expected to deduct 0.1ppt from quarterly GDP growth.

The nation's current account deficit was $16.6bn in the September quarter (around 2.4% of GDP), widening from $16.2bn in the June quarter. The current account has been in deficit since the middle of 2023, exposed by a narrowing trade surplus and large income deficits.  

As noted earlier, volatility in commodity prices over the past couple of years has weighed on the nation's export revenue. At the same time, imports have remained on an upward trajectory. The trade balance is still in surplus (more is earned from exports than is spent on imports denominated in $A); however, surpluses (grey bars in chart below) have declined significantly, down from a peak of $41.4bn in the middle of 2022 to just $2.5bn in the latest quarter. That is a fraction of the primary income deficit (-$18.7bn), which is leading to this run of current account deficits. 

In Q3, export revenue lifted by 0.9%, driven by a 1% rise in underlying volumes as prices eased by 0.1%. Goods exports (1.3%) led the way on the back of major resources (1.5%), notably coal (6.9%), while services stalled (0%). Over the past year, however, services (9.2%) have dominated goods (2.3%), as the large inflow of overseas arrivals have boosted the tourism and education sectors. 

For imports, the total spend was up 1.1% in the quarter, with volumes lifting 1.5% to more than offset cheaper prices (-0.4%). Goods (2.1%) were again the key driver, with services falling (-0.2%). Capital goods lifted sharply (6.7%) to drive import volumes, and this lines up with the acceleration seen in business investment in the quarter. This came on the back of increased orders for aircraft (236%), ADP equipment (data servers etc) (13.5%), and machinery and equipment (6%). Meanwhile, intermediate goods (4.2%) lifted as fuel imports surged (9.8%). 

Overall, with import volumes (1.5%) exceeding exports (1%), the read-through is negative for GDP growth (imports deduct from a nation's GDP). The ABS reported that net exports (exports - imports) is expected to reduce Q3 GDP by 0.1ppt.  

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%).