By Trent Saunders, Senior Economist at CBA
- The Q3 25 GDP figures pointed to an economy on a much more solid footing when compared to the last few years. GDP improved to be 2.1% higher over the year, up from a low of 0.8%/yr in Q3 24.
- The October Monthly Household Spending Indicator (MHSI) rose by a strong 1.3% in October to be 5.6% higher over the year. The strength was relatively broad-based, with all categories recording an increase.
- RBA Governor Bullock acknowledged the upside risks to inflation at Senate Estimates on Wednesday. She said that if inflation proves to be “more persistent” in upcoming CPI releases then that “might have implications for the future path of monetary policy”.
- According to Cotality, home prices nationally lifted by 1.0% in November and now sit 7.7% higher over 2025 to date.
- Offshore, lower ADP private payroll jobs reinforced signs that the US labour market is cooling and supported expectations for a December rate cut by the US Federal Reserve.
It was a busy week for Australian economic data. Domestically, the National Accounts showed the economy is on a much firmer footing compared to recent years. GDP increased by 0.4% in Q325, taking annual growth to 2.1%. This is the strongest pace of annual GDP growth in the past 2 years and is well above its low of 0.8% in Q3 24.
The transition from public to private sector-led growth is well underway, with recent strength in consumer spending and business investment supporting the cyclical upswing. Dwelling investment was also firm in the September quarter and is now 6.5% higher over the year.
The improvement in growth is positive news, but it comes with inflationary risks. Average labour costs have risen 5.5% over the past year, with labour costs in the National Accounts rising more strongly than implied by other labour market indicators. This may help to explain recent inflationary pressures and is consistent with our view that we are at the speed limit of the Australian economy.
Our base case is that the economy will remain broadly in balance and inflation will ease back to target over coming years. But if demand improves more than we forecast through 2026 and GDP growth crashes through our estimate of potential growth at 2.1%, there is a risk that the next interest rate move will be up.
RBA Governor Bullock discussed these risks in her appearance before Senate Estimates on Wednesday. Bullock maintained the RBA Board’s optionality around further cash rate moves but acknowledged the recent upward pressure on inflation. She said that if price gains prove “more persistent, and we’ll get more information on this in the next couple of months, then that’s suggesting to us that the demand pressures are persisting and that might have implications for the future path of monetary policy”.
Bullock noted that it is difficult to determine whether the economy is currently operating above potential, but her view is that the output gap has now closed. This implies that any unexpected strength in demand would put upward pressure on prices.
The October MHSI reinforced the recent upswing in demand, with spending rising by a strong 1.3%/mth in October to be 5.6% higher over the year. This was materially higher than CBA and the market expectations for a 0.6%/mth increase. Spending was particularly strong in discretionary categories, including clothing, household goods and hotels, cafes and restaurants.
While promotional events contributed to the strong outcome, the strength was relatively broad-based, including for discretionary services unaffected by discounts.
Building approvals and home prices figures were also released this week. Residential building approvals fell by 6.4% in October, following a strong 11% rise in September. Dwelling approvals totalled 192,103 in the year to October, which is a solid improvement from the low of ~165,000 in mid-2024.
According to Cotality, home prices nationally lifted by 1.0% in November and now sit 7.7% higher over 2025 to date. The strong gains across mid-tier capital cities have exceeded our expectations. Stronger investor demand and limited supply have been key drivers of the out performance.
The Balance of Payments was released on Tuesday. The current account deficit expanded modestly to $16.6bn in Q3 25 from an upwardly revised $16.2bn in Q2 25. While the overall figure surprised to the upside, the deficit has been relatively stable for several quarters now.
Offshore, lower US private sector jobs supported expectations of a December rate cut by the US Federal Reserve. ADP private payroll jobs fell by 32,000 in November, a sharp reversal from the 47,000 jobs reported in October. The weak private payrolls print reinforced recent signs that the US labour market is cooling.
Other indicators for the US labour market provided mixed signals last week. Initial jobless claims showed the number of Americans filing new applications for unemployment benefits dropped last week, but the data captured the Thanksgiving holiday, a period when claims often whipsaw.
Separate data from Challenger, Gray & Christmas showed planned job cuts declined 53% in November, though are still 24% higher over the year.
This week, attention will turn to the RBA’s December meeting and the November Labour Force Survey. We expect the RBA will keep the cash rate on hold at 3.60% next week in a unanimous decision. Given a hold is widely anticipated, markets will be focused on the post-meeting commentary for any signals that rate hikes could resume next year.
While the RBA Board will acknowledge the increased risk of higher inflation, we do not expect any major deviation from its recent commentary.
Domestically, we also have the November NAB Business Survey. We will also release the November edition of the CBA Household Spending Insights series as well as a new publication CBA Wage and Labour Insights, which will provide a view on how wages and employment are tracking in the Australian economy.
Offshore, focus will be on the US Federal Reserve’s December meeting, with the FOMC expected to cut the Fed Funds rate by 25bp.Similar to the RBA, market participants will be most interested in guidance on potential future cuts from the Fed.
