By Lucinda Jerogin, Associate Economist at CBA:
- Australian headline inflation surprised to the upside, accelerating 3.8% through the year to October. The policy relevant trimmed mean measure increased to 3.3%/yr.
- The total volume of capex also recorded a strong turnaround, up 6.4% in Q3 25.
- Construction work done fell 0.7%/qtr, driven down by a decline in engineering work owning to lumpy data from a gas project in the NT. Construction work remains 2.9% higher in annual terms.
- Offshore this week, the RBNZ cut the Official Cash Rate by 25bp as widely expected. In the US, the Fed’s Beige Book showed economic activity was little changed in recent weeks.
- The week ahead brings Q3 25 GDP in Australia. Partial data points to a stronger than previously expected 0.7%/qtr to take the annual rate to 2.2%. Home prices, building approvals, the goods trade balanceand the MHSI are also due.
- Abroad, the calendar is lighter with US and Eurozone inflation and Canadian employment data scheduled.
To kick of this week, our Chief Economic Luke Yeaman released a note discussing how Australia is already approaching its economic ‘speed limit’, with potential growth lower and excess capacity narrower than in past cyclical upswings.
The stream of data this week affirmed this. On Wednesday, the inaugural full monthly CPI exceeded expectations. Headline inflation accelerated 3.8% through the year and the trimmed mean measure increased to 3.3%/yr.
The upside surprise was driven by stronger outcomes for market services. Clothing & footwear, and household equipment were also firmer than anticipated. In contrast, new dwelling costs eased slightly.
The recent data flow has complicated the task of the RBA. A resilient labour market, rising house prices and a Q3 inflation surprise have taken rate cuts off the table. The stronger than expected monthly CPI print this week did not alleviate any upside concerns. As we continue to run close to the economy’s speed limit, the RBA will remain cautious.
We have been flagging for the last month that there will be no more rate cuts this cycle. The risk now sits with the next move in rates being up. Indeed, financial markets have been more focused on this view, removing pricing for rate cuts and beginning to price in a small chance of rate hikes in late 2026.
Heading into next week, the Q3 National Accounts data will be critical. This will provide an indication of how close the economy is to potential. The partial data released last week far exceeded expectations and suggests that Q3 GDP will be stronger than we had previously thought.
The volume of capex rose sharply in the September quarter, up 6.4% after several soft prints. This was a very large upside surprise to both us and the market. The uptick was driven by an increase in non-mining capex, in particular large spending on data centres and air transport. Capex intentions for FY2025/26 were also upgraded.
Other partial data came in the form of construction work done. The volume of construction work done fell 0.7%/qtr in September. However, unwinding from a large gas project in the NT in Q2 dampened the headline numbers. Excluding the NT, engineering work rose 2.2%/qtr.
Residential construction lifted by 4.2%/qtr to sit at a strong 8.5% higher annually. Non-residential construction work rose by 3.7%/qtr and is up 3.5% through the year.
All in all, the data received this week was stronger than expected. As a result, we have upwardly revised our preliminary GDP estimate from 0.4%/qtr to 0.7%/qtr.
Residential investment is expected to lift by 3%/qtr and business investment to rise by 4%/qtr. It is likely that much of the investment in data centres and airplanes has either come through imports or drawn from inventories over the quarter from past imports and should offset some strength.
We expect household consumption to increase by just under 0.4%/qtr and public demand to rise by 1%/qtr. A 0.7% lift in GDP, barring any revisions, would see annual growth pick up to 2.2%.
We will firm up our estimate after the Balance of Payments data early this week.
Other data prints to look out for this week are home prices, building approvals, the goods trade balance and the ABS MHSI.
Home prices look set to continue the strong momentum seen in October and lift 1.0%/mth. However, on Friday APRA announced a new limit to high debt-to-income home lending. From 1 February next year, the regulation on home loans will limit authorised deposit-taking institutions (ADIs) to lend up to 20% of their new mortgage lending at debt of six times income or more. This may take some of the heat out of the housing market, particularly for investors.
Building approvals are expected to retrace after strong gains last month while the goods trade balance will likely hold steady in October.
Household Spending is anticipated to print at a solid 0.6%/mth, continuing momentum seen in Q3.
Offshore last week, the economic calendar was lighter. The Fed’s Beige book showed economic activity was little changed in recent weeks, employment declined slightly, and prices rose moderately.
The December FOMC meeting is now less than two weeks away. Our international economics team view there is enough support in the FOMC for a 25bp cut in December.
Elsewhere, the UK Government handed down the Budget on Wednesday. The Budget will raise taxes by £26bn, largely by freezing income tax thresholds for three years. Importantly, the fiscal buffer was doubled to £22bn.
Across the Tazman, the RBNZ cut the Official Cash Rate by 25bp to 2.25% on Wednesday, as was widely expected. But the Bank pushed back on market pricing for further cuts, signalling they will only cut again if the economy underperforms their forecast.
Our colleagues at ASB expect the RBNZ will remain on hold from here. The risks lie towards another cut.
The week ahead will see the release of Eurozone and US inflation. Canadian employment data will also be one to watch.
