October 2026 | Newsletter 37
Weak productivity remains the economy’s key supply-side constraint. Although real GDP growth remained resilient in the second quarter at 2.1% year over year, labour productivity declined by 0.2%. This suggests that Australia’s potential growth rate may have weakened, contributing to an acceleration in the growth of unit labour costs. The combination of a tight labour market and subdued productivity growth is sustaining domestic cost pressures. As a result, the economy’s disinflationary impulse does not yet appear strong enough to return inflation to the 2%–3% target set by the Reserve Bank of Australia (RBA).
Elevated inflation remains the RBA’s overriding concern. Despite falling housing prices, trimmed mean consumer price inflation remained elevated in the second quarter at 3.6% year over year. Higher oil prices leave near-term inflation risks clearly skewed to the upside, while AI-related data-centre investment is adding a further source of demand and capacity pressure.