Economic Commentary

18 December 2025

Missing the approach.

·     The economy looks to be ending 2025 with private sector growth strong and the labour market healthy.

·     Inflation is expected to track above 3% for a number of quarters with the Q4 trimmed mean likely to surprise the RBA again.

·     We now expect rates to rise in H1 2026, in a modest recalibration of policy.

Over the past month, the data flow has confirmed a further strengthening and broadening of private sector growth in Q3, and ongoing strength in consumer spending in early Q4, despite a pullback in business conditions. Labour force data also continue to show that employment growth has slowed but the unemployment rate remains low. While the activity side of the economy remains encouraging, the inflation data for October suggest that pressures evident in Q3 have persisted into Q4 and point to a 0.9% qoq outcome for the trimmed mean. This is consistent with the NAB business survey which shows that capacity utilisation remains elevated. The RBA also struck a much more hawkish tone at its last meeting, noting that the strength in activity suggests no further easing is needed.

Accordingly, we have tweaked our near-term forecasts for growth and inflation. Factoring in revisions, the Q3 outcome, and strong consumer partials, we have revised up our Q4 forecast of GDP to 2.2% (yoy). On inflation, we have upped our Q4 trimmed-mean forecast to 0.9%. We continue see the quarterly inflation pulse cooling modestly through 2026, but year-ended underlying inflation will be above 3% for the next few quarters and is likely to remain above the mid-point of the RBA’s target band well into 2027. Given uncomfortable strength in recent inflation outcomes we have also realised the risk on our rate view and now formally pencil in two rate increases in H1 2026. We have nudged up our unemployment rate peak to 4.6%.

The economy looks to be ending 2025 in much stronger shape than at the end of 2024. Following the cyclical trough in growth of 0.8% yoy in Q3 2024 (when private demand had stalled) growth has accelerated through 2025, driven by a recovery in household consumption, dwelling investment and more recently a rise in business investment. Public sector investment also rebounded in Q3 after falling in the 3 prior quarters as large projects were completed.

Indeed, the key issue for early 2026 will be whether growth has outpaced the supply side of the economy amid a still low unemployment rate (and high capacity utilisation more generally) and a higher inflation starting point.

For more information, please refer to the attached document (PDF, 1MB)