Overview

• With high frequency data showing consumption growth beginning to slow, we have further revised down our 2022 GDP growth forecast to 2.2% y/y (previously 2.4%). Further out our forecasts are largely unchanged with growth expected to slow to 1.6% in 2023 and 1.8% in 2024.
• Overall, our view remains that after a strong rebound through the first half of the year, growth will be much softer over the next 12-18 months as high inflation and rapid increases in interest rates weigh on households alongside a slowdown in global growth.
• The Q2 CPI print of 6.1% y/y was in line with our expectations, and we continue to see inflation peaking in Q4 at around 7.5% y/y with trimmed mean CPI reaching 5.6% y/y. In the absence of further significant global shocks, we expect inflation to moderate over 2023 but the level of prices is likely to remain elevated.
• The labour market is now the tightest it has been in 50 years and we expect some further tightening in the near term before slowing GDP growth begins to push the unemployment rate back towards 4% in 2023 and 4.3% in 2024 – around the level of full employment. Wage growth should also pick up to over 3% by 2023.
• In late July we further brought forward our cash rate profile. We expect a fourth straight increase of 50bps at the September meeting, and 25bp follow-ups in October and November – leaving the cash rate at 2.85% by end 2022 (previously 2.60%). We see that as being mildly on the restrictive side of neutral and for now see further increases in 2023 as unlikely given our expectation for slowing growth and moderating inflation.
• Global uncertainty remains high with a series of very large shocks continuing to play out. Global growth remains a key risk as higher inflation weighs on real incomes and central banks rapidly tighten monetary policy to bring inflation back down. The war in the Ukraine also remains a key uncertainty – with a more material disruption to energy supplies likely seeing a significant downturn in Europe. China’s zero-COVID strategy also remains a risk.
• Inflation itself remains a key risk – and while partial indicators point to some easing in global price pressures, official measures have not yet peaked. The rebalancing of supply/demand, the recovery in supply chains and correction in commodity prices will all be important, but the timing of these dynamics remains difficult to predict.
• For Australia, global inflation remains a challenge with a high degree of domestic inflation having been driven by these factors. Therefore, their resolution as well as any ongoing pass through domestically will be important as will any depreciation of the exchange rate. Ultimately, domestic pressures are expected to increase in importance as global factors wane – with trends in wage growth and services inflation becoming key factors through 2023.

For further details, please see The Forward View Australia (August 2022)