NAB Economic Insights – spare capacity and the long road to 2-3% inflation

Despite a very strong start to the recovery, the economy is likely to have spare capacity for some time.

By

Spare capacity is often measured by looking at current activity and unemployment and the distance from their ideal levels – potential GDP and full employment. At these levels the economy is running neither too hot or cold – which can prompt recessions – and inflation should be sitting within the RBA’s 2-3% target.

We update our estimates of potential GDP and full employment, where we think potential GDP growth has temporarily slowed to 1% while full employment is at 4.9%. In combination with our forecasts, this suggests the output gap will be broadly closed in 2022 and that it is plausible unemployment and inflation meet the RBA’s goals in 2024, although we think there are downside risks to our outlook. Further, we note these estimates are imprecise and so economists and policy makers will monitor a range of timely indicators to gauge the spare capacity remaining in the economy.

Find out more in the NAB Economic Insights – Spare Capacity Report (March 2021)