Global

The impact of rapid tightening in monetary policy since late 2021 is becoming evident in a range of demand side indicators, however inflation has proved to be more persistent than central bankers had earlier anticipated. As a result, major central banks are set to continue rate hikes into early 2023. Combined with an energy supply shock, this will drive a sharp slowdown in economic growth next year – down to 2.2% – with the US, UK and Euro-zone set to enter recession. The recovery in 2024 is expected to be modest, with growth at 2.8%, well below the long run average of 3.4% (from 1980 onwards).

Australia

For Australia, we have upped our expectation for the cash rate peak, increased our near-term outlook for inflation and pulled back our forecasts for economic growth in 2023 and 2024. To date, the economy has remained very resilient although there are some very early signs of a slowing. This strength, along with the broadening of inflation pressures in the Q3 CPI and expected pressure from energy costs, has led us to raise the near-term inflation peak and lift our expectations for 2023 with trimmed mean inflation to be tracking around 4.0% by the end of the year. As a result, we expect monetary policy will need to move into more clearly restrictive territory, and we now expect further 25bp increases at each of the next three meetings, taking the cash rate to 3.60% by March. Higher rates will begin to weigh materially on consumption over coming months, and we expect GDP growth to slow to below 1.0% over the next two years – though we don’t see a recession. Our labour market forecasts are also slightly softer, with the unemployment rate to reach 4.5% in the second half of 2024. Wage growth should continue to increase but we expect it to peak at around 3.5%. There are risks wages accelerate more quickly, although global headwinds and uncertainty around how households will respond to higher rates weigh in the opposite direction.

Find out more in NAB’s World on Two Pages (November 2022)