Overview

• The economy continues to evolve in line with our near-term forecasts, with signs that consumption is plateauing ahead of a likely slowdown later in the year. We continue to see well below trend GDP growth of around 0.7% y/y over 2023 as higher rates increasingly weigh on household budgets.
• To allow time to assess this flow-through, the RBA paused its rate-rise cycle in April. The risk of further rate rises remains – especially if inflation or wages surprise to the upside – but the slowing data flow is likely to make rate rises harder to justify as time goes on. As such, we now see the current 3.6% cash rate as the likely peak (down from 4.1%).
• With rates assumed to peak 50bps lower, we have somewhat revised up our expectations for GDP growth in 2024 – though at 1.3% y/y this remains below trend.
• The complex dynamics of rebalancing goods and services spending, rebounding population growth, tightening monetary policy and a clouded global outlook continues to shape the outlook for Australia’s economy.
• The unemployment rate remains at record lows, but strong population growth and slowing activity should see labour market pressures ease with unemployment likely to reach 4.7% by end-2024 before settling at 4.5% in 2025. We continue to expect wage growth to pick up but remain consistent with at-target inflation.
• Likewise, inflation is well above target but higher frequency data suggest that inflation peaked in Q4 – although the Q1 release next week will be a key test. The pace of global goods disinflation, strength of domestic rent and energy price growth, and the pace of wage growth remain key uncertainties but for now we continue to see inflation returning to around 3% by end-2024.
• The housing market is likewise caught between competing forces, with higher rates impacting borrowing power and driving down approvals, but underlying population dynamics still pointing to a shortfall of housing supply. Prices falls have temporarily abated, and we now expect a total fall of 4% across 2023 (previously -11%). However, there remains considerable uncertainty as to how the market will adjust.

For further details, please see The Forward View Australia (April 2023)