David Bassanese
3 minutes reading time
Today’s firm December quarter GDP report is almost a mirror image of the September quarter result.
Back in Q3, headline GDP growth of 0.4% looked soft due to a rundown in inventories, which detracted from otherwise robust growth in domestic demand.
Fast forward to Q4 and the opposite appears to have occurred. Headline GDP growth of 0.8% was stronger than market expectations (+0.6%), although a swing to a positive inventory contribution masked a notable slowing in domestic demand.
After subtracting 0.5 percentage points from growth in Q3 due to a rundown in mining and retailer inventories (partly reflecting stronger than expected demand), inventories added 0.4 percentage points to growth in Q4 – marking a solid 0.9 percentage point turnaround.
Domestic demand itself, however, slowed sharply, rising only 0.5% in Q4 after a blistering 1.3% gain in Q3. That should provide some comfort to the Reserve Bank that overall demand in the economy is not running away.
Consumer spending remained tepid, rising just 0.3% after a 0.5% gain in Q3. Indeed, aside from a temporary 1.0% spurt in the June quarter last year, consumer spending has hardly been booming. Growth has improved from the very weak outcomes seen through 2023 and 2024, but its recent pace remains modest at best.
Business investment growth also slowed in Q4, easing from 4.0% to 0.9%, largely reflecting a pullback after a Q3 surge in spending on data centres and aircraft. Dwelling investment growth also moderated to 0.6% from 2.0% in Q3. Public demand slowed more modestly, from 1.3% to 0.8%.
Overall, despite the stronger than expected 0.8% gain in headline GDP, the report does not appear to provide the smoking gun the RBA would need to justify a rate hike as early as this month’s meeting.
Adding to the case for caution, at least in the near term, is the surge in geopolitical risks associated with the conflict in the Middle East. While the conflict poses an upside risk to inflation through higher oil prices, it also creates an offsetting downside risk to non-energy inflation if extended hostilities undermine business and consumer confidence both at home and abroad.
At this stage, the case for a RBA rate hike still appears to rest critically on the Q1 CPI report in late April. A strong result, with quarterly trimmed mean inflation of 0.8% or more, would likely result in a May rate hike. Evidence of further strong domestic demand in today’s Q4 data could have provided grounds for a rate hike this month. But as noted above, that evidence appears lacking.