Tim Hext: What GDP is really saying about inflation and rates

Australia’s GDP numbers look solid on the surface, but the real story sits beneath the headline growth. Pendal’s head of government bond strategies TIM HEXT breaks down what it means for inflation and rates.

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GIVEN events so far this week, last year’s economic data is perhaps less important than usual.

However, the Q4 2025 national accounts released today – like any set of accounts – contains interesting insights into the Australian economy as it ended the year.

The high-level numbers

Real GDP was 0.8% for the quarter and 2.6% for 2025.

Household consumption (about 55% of GDP) grew a more modest 0.3% in Q4 and 2.4% in 2025, although electricity subsidies meant this was slightly lower than otherwise. This lagged income growth, resulting in higher household savings (6.9% from 6.1%).

Public final demand (approximately 27% of GDP) was up 0.9% and 2.4% for the year.

Private dwelling investment (approximately 6% of GDP) rose 0.6% and 5.5% for the year.

Business investment (approximately 12% of GDP) rose 0.5% and was up 4.4% for the year, led by non-residential building which was up 8.9% over 2025.

Stocks (inventories) were up 0.4%, rebuilding from Q3 -0.5%. This alone was worth half the overall GDP growth.

Export growth in the quarter of 1.4% slightly lagged import growth of 1.8%, to overall slightly detract from GDP. Below, courtesy of NAB, is the contributions to the 0.8% GDP growth from these measures:

What we learnt

Much will be made of economic growth sitting at 2.6% – above the RBA’s rough estimate of potential growth nearer 2%.

However, it pays to remember this 2% potential growth assumes very benign productivity growth, as population growth alone is adding 1.5% a year.

I suspect productivity growth will surprise to the upside in the years ahead – a pleasant surprise after such benign outcomes over the last decade.

Today’s number showed productivity growth of 1% over 2025. Looking just at the market sector this number is 1.5%.

Therefore, on purely economic terms 2.6% growth is at or only just above capacity (population plus productivity).

The RBA may argue that higher inflation shows the output gap is higher, but I suspect by year end this argument will not hold.

The second key part of the National Accounts for inflation is average earnings (called AENA).

This measure looks at the average earnings per employee, and importantly includes superannuation, overtime and bonuses.

It provides a broader picture than the Wage Price Index (WPI) which just looks at changes to basic wage rates for a fixed job basket.

Today’s data showed AENA grew at 0.5% for the quarter and 4.2% for the year.

Given this included the last 0.5% increase in super contributions and the productivity improvements, it questions if the recent higher inflation is being largely driven by wage costs.

Implications for markets

Clearly there is currently a lot more going on driving bond markets, but in isolation today’s numbers paint a picture of decent growth, but not runaway growth that the RBA needs to pull back.

A May rate hike is still on the cards if Q1 CPI is 0.9% trimmed mean as expected, but beyond that we still view that inflation and employment will moderate in 2026 and no further hikes beyond May will be required.

Potentially rates could even fall in early 2027.

Therefore, the current oil price inspired bond selloff presents opportunities to add duration into bond portfolios.

Only if you think this conflict will more permanently shift oil prices significantly higher can we drag out the ‘stagflation’ word, one last seen in 2022/23.

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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