The Up and Down Economy

Resilient but slowing growth, rising unemployment, strong capex, falling house prices and stubborn inflation

The economy is more uneven than usual.

Growth is slowing, but not by much. Private sector capex and household spending are strong. Inflation remains well above the RBA target which, with the news of economic resilience, has markets pricing in a further interest rate hike – or two – in the months ahead.

At the same time, the unemployment rate is edging up and house prices are falling, factors that are eating away at household net wealth and consumer sentiment and present on-going downside risks to the outlook.

In terms of the specific news, there was unexpected strength in household spending and an upbeat outlook for business investment. This sent many forecasters to revise their outlook for economic growth markedly higher.

Household spending rose a strong 1.1 per cent in July after similarly buoyant increases of 1.0 per cent in June and 1.2 per cent in May. These are unambiguously strong results with the bulk of the gains in discretionary spending, a sign that consumer demand will add to demand growth in the September quarter.

Business investment rose 10.5 per cent in the year to the June quarter with expected Capex 15 per cent higher in FY2026-27. The upswing in Capex will not only support bottom line GDP growth, but will encourage a pick-up in productivity as the capital base grows.

GDP rose 0.4 per cent in the June quarter to be 2.1 per cent higher than a year earlier. Growth is down from the 2.6 per cent peak in December 2025, and points to a gentle landing for the economy. The composition of that growth had several noteworthy issues:

• Government demand subtracted from bottom line GDP in the first half of 2026, while private demand jumped sharply to be the sole driver of growth.

• Per capita GDP rose 0.7 per cent in the past year, signalling the early stages of a more positive outlook for householders.

• Measured productivity remains weak, falling 0.2 per cent in annual terms. This continued the story of poor productivity which is still being impacted by prior sluggish private sector capex.

Inflation eased in July, with the annual rate at 3.5 per cent from a 4.6 per cent peak in March. The trimmed mean rate was steady at 3.6 per cent having broadly held that pace since the March quarter. That said, both measures remain above the RBA target which has seen markets price in a further interest rate rise.

Employment fell 17,000 in July, but this followed an increase of 80,000 in June. While the monthly data remain volatile, the trend remains towards a slowing in job creation. The unemployment rate ticked up to 4.5 per cent in July, to be 0.5 percentage points higher than a year ago.

In trend terms, the number of new dwelling building approvals continues to rise. In July, they reached a four year high to be 38 per cent above the cyclical low in 2023.

Falls in house prices have continued to unfold through August, which was the fifth straight month of price declines. The peak-to-current decline is 3.6 per cent and growing. The weakness is most marked in Sydney where prices are down over 7 per cent from their peak, with a 6 per cent fall in Melbourne. Previous ‘boom’ cities for house prices, Perth, Brisbane and Adelaide, are now experiencing price falls along with Canberra and Hobart.

New Zealand

The RBNZ increased the cash rate to 2.75 per cent in early September as it struggled with an above target 4.1 per cent inflation rate, lacklustre economic growth and a 5.6 per cent unemployment rate, which is a 12 year high and up markedly from the low of 3.2 per cent in early 2021.

The pace of economic growth remains subdued, but is still a recovery from the recent recession. Household income growth remains weak and house prices remain flat after the sharp falls of the prior three years.

Despite this uneven economic performance, the RBNZ is likely to further hike interest rates over the next year as it works to bring inflation back to target. The November election will be watched for signs of policy changes that may impact the economy. The opposition Labour Party are marginally ahead of the incumbent Nationals in most polls.