Australia Economic Growth Disappoints, Easing Rate-Hike Bets
Samantha LuanAustralia's economy grew at a surprisingly softer pace last quarter as households opted to save some of their income gains, clouding the picture on the economy's strength and suggesting markets may have been premature in pricing interest-rate hikes.
Australia's economy grew at a surprisingly softer pace last quarter as households opted to save some of their income gains, clouding the picture on the economy's strength and suggesting markets may have been premature in pricing interest-rate hikes.
Gross domestic product advanced 0.4% in the three months through September, slower than the predicted 0.7%, government data showed Wednesday. The 2.1% annual expansion came in just below a forecast 2.2% gain.
The Australian dollar and government bond yields slipped after the data, erasing an earlier gain as traders trimmed bets on the Reserve Bank turning more hawkish next year. Traders priced a roughly even chance of a rate hike by end-2026, up from about 80% prior to the data.
The market reaction is a relief for Australia's bond market after its worst monthly selloff in more than a year in November, spurred by bets the RBA will hike its policy rate next year amid inflation pressures and a still healthy jobs market. The divergence in policy with the Federal Reserve has seen the yield premium Australian bonds hold over their Treasury counterparts rise to the most in more than three years.
The GDP figures land just under a week before the RBA's final policy decision of the year, when rates are widely expected to stay unchanged at 3.6% after three cuts this year. The RBA expects the economy to grow around its "potential" rate of 2% in 2026, supported by lower borrowing costs, steady household incomes and still-strong population growth.
At the same time, inflation remains uncomfortably elevated and the RBA assesses the labor market as still a bit tight, underscoring the delicate policy balance the rate-setting board must navigate.
The RBA is uncertain about the restrictiveness of monetary policy and whether the economy is running beyond its speed limit. A key question for policymakers is also how much further they can lower borrowing costs, if at all, in an environment of a still-tight labor market and poor productivity growth.
Weak productivity means any pickup in demand risks spilling straight into prices. The RBA has already cut its estimate of the economy's potential growth rate to just 2%, effectively lowering Australia's speed limit. With less room to run, the country can't grow as quickly without reigniting inflation, keeping policymakers wary.
The GDP data showed the household savings ratio climbed to 6.4% from 6% three months earlier, underpinned by higher incomes. Households also shifted away from discretionary spending, down 0.2%, while boosting essential outlays which jumped 1%.
Economic output per person was flat in the third quarter. GDP per capita slid for seven consecutive quarters through 2023 and much of 2024, in a sign of declining living standards.
