Economy rebounds

Australia’s economy grew 0.4% in the September quarter and 2.1% over the year. Growth momentum, however, eased during the quarter, weighed down by a decline in inventories as businesses ran down stock to support exports, and from net trade, with imports rising faster than exports. Despite this softening, overall activity was underpinned by strong domestic demand. Domestic final demand grew by 1.2%, up from 0.5% in the previous quarter, driven by stronger private investment and continued growth in household consumption.

Private investment recorded its fastest growth since March 2021, led by business spending on machinery, equipment and major data centres in New South Wales and Victoria. Household consumption, while down from the previous quarter, continued to expand, supported by spending on insurance, electricity, gas, rent, healthcare and food. The savings rate rose to 6.4%, indicating households have been able to spend and save as income growth normalises, further enhanced by several interest rate cuts earlier in the year.

Inflation rose to 3.8% in December, up from 3.4% in November. The brief November dip proved temporary, with a strong rebound in December underscoring the persistence of underlying inflation. Housing remained the largest contributor to annual inflation, driven by higher electricity costs associated with the timing of government rebates. Inflation across both goods and services picked up, with services inflation rising to 4.1%, up from 3.6% in November, driven primarily by domestic travel, accommodation and rents. Core inflation edged up to 3.3%, from 3.2%, remaining above the Reserve Bank of Australia’s 2 to 3% target band.

Unemployment fell to 4.1% in December, down from 4.3% in November, marking the lowest rate in seven months. Trend measures, which smooth month-to-month volatility, also tightened, edging down to 4.2% from 4.3%. Employment rose by 65,200 in December, reversing November’s weaker outcome.

The renewed lift in underlying inflation and the continued tightness in the labour market were key factors behind the RBA’s decision to raise the cash rate in February 2026. The Bank highlighted that stronger-than-expected private demand, rising capacity pressures, and ongoing momentum in the housing market as contributors to persistent inflation. Labour market conditions remain tighter than anticipated, with unemployment lower than expected and underutilisation still at low levels. These dynamics, combined with uncertainty about how restrictive current policy settings are, strengthened the case for the February rate increase.

Looking ahead, Australia’s economic outlook appears to be gradually improving. A rebound in private-sector activity, rising consumer confidence and growing house prices are supporting momentum. Domestic demand is likely to remain a key growth driver, though its strength will depend on the trajectory of household spending and business investment trends. Inflation remains above target and poses a potential constraint, particularly if price pressures prove persistent. Jobs growth has moderated and wage gains have softened, while global uncertainty adds further downside risk. Monetary policy is expected to remain cautious, with the RBA keeping open the option for further rate hikes in the coming months, should conditions warrant.