Moderate Economic Recovery Helps Keep Inflation on Target

Data and events over the past month have confirmed that Australia’s economy grew by a moderate 0.6 per cent in the June quarter or 1.8 per cent in annual terms. While this is the strongest annual growth since 2023, it remains below potential. The ongoing softness in the economy has seen employment growth weaken over the last three months and inflation continues to track within the RBA’s 2 to 3 per cent target band.

The RBA delivered a third 25 basis point interest rate cut in August and signalled that further rate reductions would be on offer if inflation remains on target. There was no guidance as to the timing of those probable reductions, although the futures market is pricing in approximately two further 25 basis point rate cuts by the first half of 2026.

In the past month, the global economy has continued to expand. Growth remains moderate, inflation relatively low and central banks have been more cautious with slower and more spaced-out interest rate cuts.

Geopolitical and tariff issues remain prominent, although economic conditions and financial markets are, for now, absorbing the news. There is an ongoing high level risk that these issues will disrupt the current calm.

Australia

In addition to mildly encouraging GDP result for the June quarter, there have been further signs of the economic pick up being sustained into the second half of 2025.

Household spending rose 0.7 per cent in real terms in the June quarter, as rising real wages, a strong wealth effect and lower interest rates boosted consumer spending and confidence. A sustained recovery in household spending is a vital element of a return to sustained solid economic growth.

The number of building approvals has been trending higher over the past 18 months. This supply side response to the housing shortage is being aided by the government’s reform agenda to reduce red tape and regulations, changes to zoning rules and an easing in building cost pressures, including interest rates. The pick up in dwelling construction has much further to run.

Employment growth is softening in the usual lagged response to earlier economic weakness. In the three months to July, employment rose by a cumulative 25,000 people, the weakest three monthly result since the Covid pandemic. The unemployment rate has increased from around 3.5 per cent in late 2023 to 4 per cent in early 2025 and in the most recent reading, has reached a three year high of 4.25 per cent.

New Zealand

There is a “jobless recovery” unfolding in New Zealand with further signs of a recovery in economic activity failing to be reflected in a turn in labour market conditions. Retail trade rose a solid 0.5 per cent in the June quarter to be 2.3 per cent higher than a year earlier. Easier monetary policy is supporting consumer spending. Despite this, the unemployment rate rose to a new cyclical high of 5.2 per cent in the June quarter, to be a full 2 percentage points above the low point in the cycle in 2022.

The RBNZ cut interest rates by 25 basis points in August and signalled further cuts were possible if the unemployment rate continues to rise. With inflation broadly on target, there have been a total of 250 basis points of interest rate cuts in this cycle, which contrasts with the 75 basis points of cuts from the RBA.

Currencies

The NZD has weakened is response to the rate cuts and the RBNZ dovishness. It has tracked around 59 US cents while the AUD has strengthened marginally to around 65.5 US cents. The AUD NZD cross has, as a result, moved to 1.11. The USD remains vulnerable to policy ructions in the US, not just from the Federal Reserve, but more so from the Trump administration over key appointments, budget policy and geopolitical tensions.