Sydney, Australia — Australia’s economy showed strong signs of growth in the third quarter, but the expansion fell short of analyst projections. Gross domestic product (GDP) increased by 2.1% year-on-year, the fastest growth rate in nearly two years, according to recent data from the Australian Bureau of Statistics. Economists had anticipated a slightly higher growth rate of 2.2%.

Overall, GDP rose by 0.4% from the previous quarter, which was below the 0.7% expected in a Reuters poll. Despite the slight miss, analysts noted that this doesn’t indicate a fundamental weakness in the economy. Excluding trade and inventory changes, domestic economic activity surged by 1.2% compared to the previous quarter, marking the strongest performance in over two years.

Harry Murphy Cruise, head of economic research at Oxford Economics, emphasized that the headline numbers may be misleading. He attributed part of the shortfall to more aggressive inventory write-downs than anticipated, suggesting these fluctuations are more about accounting practices than actual demand. Sunny Nguyen, head of Australia economics at Moody’s Analytics, echoed this sentiment, emphasizing the need to focus on underlying economic strength rather than the headline figure.

The increase in domestic final demand contributed significantly to growth, accounting for 1.1 percentage points. Private investment recorded its most substantial rise since March 2021, largely propelled by expenditures in machinery, equipment, and major data centers in New South Wales and Victoria. Additionally, household spending remained robust, particularly in sectors like healthcare, energy, and food.

Conversely, net trade presented a challenge, subtracting 0.1 percentage points from growth due to a more substantial increase in imports compared to exports during the three months ending in September. Before the release of GDP data, Reserve Bank of Australia (RBA) Governor Michele Bullock had warned that the economy might be nearing its growth potential amidst persistently high inflation.

Inflation rates accelerated in October, rising by 3.8% from the previous year, which was the largest increase in seven months and exceeded the RBA’s target range of 2% to 3%. Last month, the RBA opted to keep interest rates steady at 3.6%, citing a cautious outlook influenced by a strengthening economy and a tight labor market.

The Q3 data has led analysts to conclude that the economy is expanding too rapidly for the RBA’s comfort. Cruise noted that interest rate cuts are unlikely for the foreseeable future, and additional hikes may be considered to curb inflation. Following the GDP report, yields on Australian government 10-year bonds rose, reflecting market reactions to the economic indicators.

With the RBA set to meet next week, the prevailing sentiment among economists suggests that rates will remain unchanged at 3.6%. They caution that the current interest rate cycle may be nearing its conclusion, as projections indicate inflation will likely stay above the target range well into next year.

In the second quarter of the year, Australia’s economy grew by 1.8% year-on-year, reflecting robust domestic spending trends in both household and government sectors. As the nation navigates these economic developments, attention will remain focused on both growth indicators and inflation trends, shaping future monetary policy decisions.