Key insights from the week that was.
In Australia, GDP rose 0.8% in Q4. While this fell short of our revised forecast of 1.1%, it was still a robust result which, together with recent revisions, lifted the annual growth pace to 2.6% – the strongest outcome since Q1 2023. Today’s note from Chief Economist Luci Ellis provides a succinct summary of the key takeaways from the Q4 report.
One component of demand worth highlighting here is consumer spending, having surprised to the downside in Q4 with a meagre 0.3% gain. Temporary factors look to be a partial explanation, particularly for electricity spending – milder weather and a larger impact from state electricity rebates saw volumes and prices drop. Additionally, our estimate of non-tourism spending offshore, based on card activity, was much stronger than the estimates provided by the ABS, although future revisions could see these difference narrow. Overall, consumer spending is best characterised as steadying rather than slowing, with a relatively solid outlook for disposable incomes and savings to provide a cushion against higher interest and tax payments.
Cotality data also points to further, albeit more modest, wealth gains, home prices reported to have risen 0.6% nationally in February, with affordability constraints primarily impacting Sydney and Melbourne. While dwelling approvals fell by –7.2% in January, the pipeline remains robust and should help alleviate tight supply over time. For more detail and forecasts on the housing market, see our latest Housing Pulse.
Outside of domestic demand, inventories were a meaningful contributor to growth in Q4, adding +0.3ppts, but net exports a modest detractor (–0.1ppt). On external demand, partials released ahead of GDP showed the current account balance recorded its widest deficit in a decade at –$22.1bn in Q4, largely owing to stronger import volumes and price effects – a trend that looks to have persisted in January’s goods trade.
Offshore, the focus was on the escalating conflict in the Middle East. Over the past week, the US and Israel have undertaken targeted military actions against Iran. The Supreme Leader Ayatollah Ali Khamenei was killed along with several other senior leaders. Iran has retaliated against US assets in the region, Israel and some other infrastructure across the Middle East. For the world more broadly, the main risks surround energy supply through the Strait of Hormuz and the shutting down of sea/air freight and passenger flights through the region. The US has offered to guard ships travelling along the Strait of Hormuz and to insure them to mitigate transit risks. Earlier in the week, we undertook an initial estimate of the potential cost to the Australian and New Zealand economies of three potential scenarios for the conflict.
In the US meanwhile, the ISM services PMI provided a slight reprieve, the headline index increasing 2.3pts to 56.1, a high back to mid-2022. New orders gained 5.5pts in the month, but employment a more modest 1.5pts, while the prices paid component eased back to now be modestly below the 5-year average. Comments from respondents suggest demand for data centres and continued resilience in consumer spending are benefitting the sector. Manufacturing conditions remain soft, the headline ISM manufacturing index broadly unchanged in the month. New orders lost momentum, and the employment index remained sub-50. The prices paid component points to cost pressures, however, rising back to its highest level since mid-2022.
Late in the week in Asia, guidance from China’s annual National People’s Congress implied quality growth and stability will be authorities’ focus in 2026. The overall growth target was lowered from “around 5.0%” to “around 4.5-5%”, and the Central Government fiscal target kept at 4% of GDP. The top three priorities focus on improving domestic industries and technologies, aided by a 7.0% annual increase in research and development spending throughout the decade. Boosting domestic demand was the fourth most important priority, but little policy detail was offered here. On the housing market, authorities are still aiming to ‘stabilise’ the sector – this applies to prices and construction activity. We believe pro-active stimulus is necessary to achieve growth of around 4.5% this year and to ward off downside risks for the years to come. This is most likely to take the form of additional funding for local governments and financial sector initiatives to turn the housing market. For consumption, confidence is key. An improvement here will require evidence of greater job creation and broad, sustained gains for wealth.
Lastly, Japanese Financial Statement data for Q4 2025 indicates that conditions are likely to warrant another rate hike by the Bank of Japan in 2026. Profitability rose 4.7%yr, putting operating margins at their highest level since the 1960s. This was mostly the result of businesses in the services sector which have been aided by the tourism boom post-COVID. That said, most industries have experienced a persistent uptrend in profitability since the pandemic – this will ensure nominal wage increases can continue in 2026. Investment growth is also strong, 7.3%yr, particularly in the services sector. Reports suggest much of the investment is to counteract labour shortages.
