It’s that time of year when June balancing companies finalise their budgets for the new Australian financial year.
This note provides some guidance as to possible budget assumptions for Australian growth, inflation, wages, interest rates and the $A from NAB’s forecasts, but also some of the context, thinking behind, and risks to the forecasts, which is almost always at least as, if not more, important than a spot numerical forecast.
Arguably, the context, sectoral considerations and risks are even more important than normal as different sectors continue to experience significantly different economic activity and demand dynamics due to the disturbances to activity introduced by COVID. To these considerations, we must overlay the degree of sensitivity to interest rates, energy prices and wages and whether there is pent-up or pulled-forward demand.
Our key assumptions and comments on the year ahead are these:
Overall, we expect little real GDP growth for the economy as a whole next year (0.5% year-average). Real GDP reflects volumes of activity and employment. Nominal growth, which is closer to revenues, which businesses most often budget on, will be stronger, reflecting still elevated inflation. Businesses should also expect very different growth experiences for sectors that performed well during COVID and the interest-sensitive sectors of the economy (eg Consumer Spending, Housing Construction – weaker than the average), but expect some residual strength in some services sectors, where pent-up demand remains (eg international travel). The risk is of even slower growth as the RBA is expected to raise interest rates twice more.
On inflation, similarly, there will be diverse trends within a still elevated but lower CPI outcome of around 3.5% over the four quarters to June 2024 (i.e. average prices 4.3% higher in FY24 than FY23). Goods inflation is expected to moderate, reflecting supply chain resolution and reduced freight, but services inflation is expected to remain very elevated in Australia reflecting later rises in energy prices, rents and wages.
The $A is expected to appreciate through the year, broadly reflecting generalised US$ weakness, but also improved risk sentiment. We expect an average for the year of $0.725 and a June 2024 rate of US$0.73. The risk of global recession is the key downside risks to NAB’s positive FX forecasts.