Key Highlights

• Potential growth cannot be observed directly and has to be estimated.

• The RBA describes growth as a little below potential, not dramatically so.

• Inflation remains high, with trimmed mean at 3.7% in the September quarter.

• The rise in Unemployment reflected more people looking for work.

A short phrase in the Reserve Bank's November assessment of the economy relies on one of the more abstract ideas in economics, and understanding it helps explain how the RBA connects growth, jobs and inflation.

Tucked into the Economic Conditions chapter of the November 2026 Statement on Monetary Policy (SMP) is a sentence that is easy to skim past. The Reserve Bank of Australia (RBA) observes that GDP growth "has slowed this year to a little below its potential growth rate".

It sounds technical, and in a sense it is. But the concept of "potential" growth sits at the heart of how central banks think about inflation. It also helps explain the RBA's decision on 3 November to lift the cash rate target to 4.85 per cent.

Potential growth, in plain English

Think of an economy's potential growth rate as its sustainable cruising speed. It is the pace at which output can expand over time given the growth in the number of available workers and improvements in how productively they work, without putting persistent upward pressure on prices.

When actual growth runs faster than potential, Demand tends to outpace the economy's ability to Supply goods and services. Businesses find it harder to hire, capacity gets stretched, and Inflation pressures build. When growth runs below potential, the reverse tends to happen: spare capacity gradually opens up and price pressures can ease.

Potential growth cannot be observed directly. It has to be estimated, and estimates can change as new information arrives. That is one reason the RBA's phrasing is measured: growth is "a little below" potential, not dramatically so.

What sits behind the RBA's assessment

The SMP provides several clues to how the economy has been travelling. The forecasts show year-ended GDP growth of 2.1 per cent for June 2026, easing to 1.6 per cent by December 2026.

The Economic Conditions chapter also notes that "Housing prices have declined further from their peak in March". The Financial Conditions chapter adds that "housing prices have declined by more than expected" and describes conditions overall as "restrictive, but with various cross-currents". One of those cross-currents is that Business Credit growth remains very encouraging.

Why below-potential growth is part of the plan

It might seem odd that a Central Bank would raise interest rates when growth is already below potential. The explanation lies in the balance between growth and inflation.

Inflation remains high. According to the SMP Overview, "Headline inflation was 3.9 per cent over the year to the September quarter and trimmed mean inflation was 3.7 per cent." The RBA expects headline inflation to peak at 4.5 per cent in the December 2026 quarter, and both headline and trimmed mean inflation to stay above 3 per cent until the end of 2027.

To bring that inflation down, the RBA's framework suggests the economy may need to run with some spare capacity for a while. Growing a little below potential is one way that spare capacity emerges. The Monetary Policy Board's statement put it directly: "the Board judged that a further tightening in financial conditions is warranted".

Governor Michele Bullock described the trade-off at her media conference: "Some pain now will prevent even worse pain down the track." She added: "Returning inflation to target is our priority, and we will do what is necessary to achieve that."

How a growth gap shows up in jobs

The labour market is where below-potential growth often becomes most visible. The SMP Overview reports that "The unemployment rate rose by more than expected to average 4.6 per cent in the September quarter." The forecasts show it rising gradually to 4.7 per cent by December 2026, 4.9 per cent by December 2027 and 5.1 per cent by December 2028.

The recent rise has a specific character, though. The Economic Conditions chapter says "employment growth held up in the September quarter as expected", and that the increase in unemployment largely reflected higher-than-expected labour supply. In other words, more people were looking for work than the RBA had anticipated, rather than jobs disappearing at a faster pace.

That detail matters for interpreting "below potential". Potential growth depends partly on labour supply. If more people join the workforce, the economy's capacity grows too, and the gap between actual and potential output can widen even if actual growth holds steady.

Potential growth and technology

The concept of potential also links to productivity, a theme Assistant Governor (Economic) Sarah Hunter explored in a speech on 9 November about artificial intelligence. She noted that estimates of AI's contribution to productivity over the next decade range from "over 2 per cent per annum to just 0.1 per cent." She also cautioned: "So far, there is limited evidence that AI has materially lifted aggregate productivity."

Faster productivity growth would lift the economy's potential growth rate, allowing it to grow more quickly without generating inflation.

What comes next

The forecasts imply growth staying below 2 per cent through the projection period, at 1.3 per cent in December 2027 and June 2028 before lifting to 1.5 per cent by December 2028. Those numbers rest on a market-based cash rate assumption that "increases by 35 basis points by mid-2027, before declining a little to stabilise at 4.8 per cent in 2028", as well as assumptions about oil prices and the exchange rate.

The next cash rate decision is due at 2.30 pm on 8 December.

The bottom line

When the RBA says growth has slowed to "a little below its potential growth rate", it means the economy is expanding slightly more slowly than its estimated sustainable pace, allowing some spare capacity to open up. With inflation still well above where the RBA wants it, the Board has judged that tighter financial conditions are warranted, even as growth cools and unemployment edges higher. Potential growth is an estimate rather than a measurement, and changes in labour supply or productivity could shift it over time.