Latest GDP data makes the case for another interest rate rise before the year’s end
Australia's economy expanded 0.4% in the June quarter, bringing annual growth to 2.1%, per the latest data from the Australian Bureau of Statistics (ABS).
While it marked a slowdown from the 2.5% pace recorded in March, it was nonetheless a smaller slowdown than almost anyone expected, leaving the Reserve Bank of Australia (RBA) with a genuine problem: the economy isn't cooling as fast as its own forecasts assumed.
Beating expectations on every measure
Economists had pencilled in quarterly growth of just 0.3%, taking the annual rate to somewhere between 1.8% and 1.9%.
The RBA's own forecast, published in its most recent set of projections, assumed annual growth of 1.9% over the year to June. The actual result – 2.1% – came in above both.
Grace Kim, ABS head of national accounts, said the composition of that growth mattered as much as the headline number. "Economic growth remained subdued in the June quarter as households continued to behave cautiously," Kim said. "While increased spending and business investment occurred in pockets of the economy, imports supported much of the growth, moderating its contribution to overall GDP growth."
The GDP print matters in the context of the economy's "speed limit" – the rate at which it can grow without adding to inflationary pressure.
With the annual growth rate still running above that limit, even as it slows, the RBA may be strong-armed into a fourth 25-basis-point interest rate hike before 2026 comes to an end.
Where the growth actually came from
Household consumption rose 0.4% in the quarter, with spending generally subdued across most categories. One notable exception was vehicle purchases, which jumped 10.3% as households continued shifting toward electric vehicles.
"The rise in electric vehicle purchases may have reflected households taking a longer-term approach to cost of living pressures, with some choosing EVs to help reduce ongoing expenses," Kim said. The household saving-to-income ratio held broadly steady, edging up from 6.4% to 6.5%.
Private business investment fell 0.5% for the quarter, driven by a pullback in spending on machinery and equipment for data centre fit-outs after a sharp rise in March – though the ABS noted data centre investment remains elevated overall.
Business investment was still 10.4% higher than a year earlier. Compensation of employees rose 1.5%, reflecting continued competition for skilled workers alongside wage growth, bonuses and redundancy payments.
The Middle East conflict's fingerprints are all over the data
Much of the quarter's detail traces back to the ongoing conflict in the Middle East and its effect on fuel prices and travel.
Household fuel consumption fell in response to elevated prices, and both domestic and international travel were scaled back. Imports of services fell 4.9% as a result
"The number of Australians travelling overseas for the northern hemisphere summer fell for the first time since the COVID-19 pandemic, significantly reducing international travel expenditure," Kim noted.
Goods imports moved the other way, rising 2.4% on higher purchases of cars and planes, while exports rose 0.8% on stronger coal production. Net trade added 0.1 percentage points to quarterly growth overall.
What it means for the RBA
The timing is awkward for the central bank. This print lands just weeks after July's inflation data came in hotter than economists expected, with the RBA's preferred trimmed mean measure stuck at 3.6% for a second straight month.
RBA deputy governor Andrew Hauser told an event in Brisbane last month that consumer spending and employment growth would need to slow further before inflation could be expected to return to target. "We've seen a little bit of that so far," he said. "We're going to need to see more to get inflation back."
Today's GDP figures are, on their face, evidence of the opposite – an economy still growing above the RBA's own forecast pace. It's worth noting that quarterly GDP is a backward-looking measure that the RBA weighs less heavily than more current indicators like monthly inflation and employment data, and this particular quarter mostly predates the full effect of this year's three cash rate rises.
Even so, taken alongside sticky inflation, the data adds to rather than undermines the case for further tightening. That's consistent with the view CommBank senior economist Trent Saunders set out this week, where CommBank's own updated forecast expects the RBA to raise the cash rate a further 0.25 percentage points to 4.6% in November – a call this GDP print does nothing to challenge, and arguably reinforces.
