Growth, inflation and labour market all easing
Rapidly tightening monetary policy, an energy price shock in Europe and deteriorating domestic conditions in China are set to slow global economic growth to 2.3% in 2023. For Australia, we see growth slowing to well below 2% in each of the next two years, however we do not expect a major downturn.
Rapidly tightening monetary policy, an energy price shock in Europe and deteriorating domestic conditions in China (due to a property downturn and the impact of zero-COVID policies) are set to slow global economic growth to 2.3% in 2023. With the exception of the extreme shocks associated with the global financial crisis and COVID-19, this would represent the slowest growth rate since 1993. Advanced economies are expected to be particularly weak – the US and the Euro-zone are forecast to record no growth while the UK economy is tipped to marginally contract. The recovery in 2024 is relatively modest – with growth at 2.8% – well below the long run average of 3.4% (from 1980 onwards).
For Australia, we have upped our Q3 expectation for consumption based on the resilience seen in internal and official measures of consumer spending and the ongoing strength in trading conditions in our business survey. However, that does not change our view that consumption – and therefore, overall growth – will slow from here with higher rates and inflation beginning to impact household budgets more heavily. That said, while we see growth slowing to well below 2% in each of the next two years, we do not expect a major downturn. Slower growth will see the unemployment rate drift up to around 4.2% by end 2024 after troughing around 3.4%. At these levels, it is likely that the unemployment rate would still be consistent with ‘full-employment’ and we expect wage growth to continue to rise, reaching around 3.5% in 2023. Domestic inflation pressure will become increasingly important as global impacts on the CPI begin to wane. We expect both the headline and trimmed-mean measures to peak in Q4 before easing through 2023. Where inflation is expected to settle will be important for the evolution of interest rates from here. For now, expected wage growth is consistent with ‘at target’ inflation and we therefore expect the RBA to pause after increasing rates at the November and December meetings, taking the cash rate to 3.1%.
Find out more in NAB’s World on Two Pages (October 2022)
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