Runners jog along the boardwalk past the Sydney Harbor Bridge.
(Bloomberg) — Australia’s economy grew at a surprisingly softer pace last quarter even as the details showed domestic demand held up and labor costs stayed elevated, a result that whipsawed markets.
Gross domestic product advanced 0.4% in the three months through September, slower than the predicted 0.7%, government data showed Wednesday. On an annual basis, the economy expanded 2.1%, the fastest pace since the third quarter of 2022.
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Markets initially read the report as disappointing, sending the currency and bond yields lower in response to traders timming bets on an interest-rate hike next year. They later reversed course and overnight-indexed swaps now imply a 70% chance the Reserve Bank will raise borrowing costs by the end of September.
Investors are focused on unit labor costs — a gauge of domestically-generated inflation — which rose 4.9% from a year earlier, suggesting wages are rising too quickly to be consistent with the RBA’s 2-3% inflation target.
“Information on inflation was generally less pleasing,” said Andrew Ticehurst, a senior Australia rates strategist at Nomura Holdings Inc. in Sydney. “There is little within this report that will give the RBA comfort. We anticipate a further hawkish shift in tone at its policy meeting next week.”
The RBA holds its final policy meeting of the year on Dec. 8-9, when rates are widely expected to stay unchanged at 3.6% after three cuts this year. The bank 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.
Su-Lin Ong, chief economist at Royal Bank of Canada, reckons that details in today’s report pointed to underlying strength in the economy with private demand continuing to pick up.
“At a time when the labor market’s pretty healthy, the economy has limited capacity and inflation is already pushing at above target,” Ong said. “That continued strength in unit labor costs suggest that the bank really has no scope to cut rates, that it needs to stay on the sidelines.”
And if inflation does surprise to the upside then there’s a risk that the next move in rates is up, she added.
That was also the assessment of RBA Governor Michele Bullock who warned earlier Wednesday that the rate-setting board would act on renewed price pressures. That had prompted traders to pull forward expectations for a hike to August, from November.