Overview

• Overall, we have made little change to our outlook for GDP but have updated our labour market view as unemployment falls faster than most expected. We have also extended the forecasts to include 2023 – where we are expecting around trend growth but more moderate reductions in unemployment.
• The economic recovery continues to unfold at a brisk pace – and forward looking/high frequency indicators point to ongoing strength in activity and the labour market even as some fiscal support is wound back.
• While our NAB data shows some softening in consumption growth, the NAB Business Survey showed ongoing strength in March. Alongside strong reads for confidence and conditions, capacity utilisation also strengthened further, suggesting that beyond just a rebound in activity, there is likely a solid underlying momentum in the economy.
• We see GDP as having fully recovered its pre-COVID level in Q1 – with another quarterly rise of around 1%. While this is encouraging, a large degree of spare capacity remains in the labour market and the output gap remains positive – and will not likely be closed for an extended period.
• Indeed, employment has now more than recovered its pre-COVID levels and the NAB Business Survey as well as Job ads/vacancies point to ongoing strength in labour demand. However, the unemployment rate remains around ¾ ppt higher than pre-COVID levels implying ongoing slack in the labour market.
• The key implication of ongoing slack in the labour market (as well as the economy more broadly) is that wages growth and hence inflationary pressure will remain soft, despite above trend growth in the near term. This points to ongoing easy monetary policy, and possibly the need for further fiscal support.
• On policy, however, the faster than expected rebound in activity and the unfolding recovery in the labour market suggests that the RBA cannot credibly commit to unchanged rates – according to the YCC program – beyond the April 2024 bond. Therefore, we continue to expect an announcement will be made by August that the RBA will begin to wind back this program by limiting purchases to the April 2024 bond.
• That said, the degree of remaining spare capacity in the economy warrants ongoing easy monetary policy for some time. Consequently, while we expect YCC to be tapered, we expect the RBA to continue a 3rd round of QE ($100bn) and for the cash rate to remain on hold until at least early 2024.

For further details, please see The Forward View Australia – April 2021