By Stella Qiu and Wayne Cole
SYDNEY, Dec 3 (Reuters) - Australia's economy grew at the fastest annual pace in two years in the September quarter, fuelled by business, government and consumer spending as markets wagered the next move in interest rates could be up, rather than down.
Data from the Australian Bureau of Statistics showed real gross domestic product (GDP) in the third quarter climbed by 2.1% from the same period a year earlier, the fastest since mid-2023 and above the RBA's estimate of trend growth of 2%.
GDP rose by 0.4% from the prior quarter, missing forecasts for a gain of 0.7% and slowing from an upwardly revised 0.7% in the previous quarter.
Inflation measures in the report also remained high just as the central bank chief has warned the economy could be already at its potential growth limit.
"The economy is in good shape. Slightly too good, in fact, for the RBA," said Harry Murphy Cruise, head of economic research for Oxford Economics Australia.
"With inflation rising and domestic momentum building, the central bank has its work cut out for it. Rate cuts are off the table for some time, and a hike next week to nip inflation in the bud can't be ruled out."
The RBA board meets next Tuesday and is considered certain to hold rates at 3.60%, and perhaps turn more hawkish on the outlook for further easing.
After the data was released, the Australian dollar climbed 0.2% to $0.6579, while three-year government bond futures wobbled but were last down 6 ticks to 95.99, the lowest since January.
Swaps imply the Reserve Bank of Australia will remain on hold until late next year, but are now fully pricing in a rate hike by the end of 2026.
The slowdown in quarter-on-quarter growth was mostly due to an outsized drag in inventories, which took off 0.5 percentage points from GDP. But, in a sign of underlying strength, domestic final demand picked up sharply to add 1.1 ppt on a quarterly basis to growth.
BUSINESSES JOIN GROWTH STORY
Private investment added 0.5 ppt in quarterly terms to growth, reflecting the ongoing expansion in data centres, the ABS said. That represents a long-delayed recovery in business investment after three rate cuts this year.
Government spending also added 0.2 ppt to the quarterly growth, after barely contributing anything the previous quarter. Household consumption added 0.3 ppt, driven mostly by essential spending.
The household savings ratio climbed to 6.4%, from an upwardly revised 6.0%, suggesting consumers still had plenty of spending power left.
The robust domestic demand is one reason that inflation has been hotter than expected in recent months. Australia's inflation jumped to 3.8% in October while the trimmed mean measure of core inflation also climbed back to above the 2%-3% the RBA is targeting.
Measures of inflation in the report showed the price deflator rose 1.3% in the quarter, which lifted nominal annual GDP growth to 5.4%.
"There’s little dovish evidence for the RBA besides some easing of unit labour costs and slight improvement in productivity," said analysts at Citi Australia in a note to clients.
"The relatively solid domestic demand in Q3 sets up for a tantalising Q4, where households are expected to unleash spending on big ticket items during the sale events. This keeps us wary of hawkish risks ahead."
(Reporting by Stella Qiu and Wayne Cole; Editing by Tom Hogue and Christian Schmollinger)
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