August 15, 2023

The Forward View – Australia: August 2023

Flat consumption in Q2 with one more rate rise left

Our podcast series continues with the NAB Forward View – Australia, giving you a 10 minute summary of our key forecasts this month.  To listen, just click the link below.Listen now.

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  • With inflation moderating more than expected in Q2 and further evidence of activity slowing, we now see only one more rise in the cash rate, taking the peak to 4.35% – most likely in November.
  • Our forecasts for GDP growth have strengthened marginally, reflecting stronger Q2 exports, but we nonetheless continue to expect growth to be well below trend at 0.7% y/y in 2023 and 0.9% y/y in 2024.
  • High inflation and the ongoing pass through of rate rises continues to weigh on households. Real consumption was most likely flat in Q2 and we see small falls in H2 2023. Importantly, consumption growth should improve in 2024 as inflation moderates and rates begin to normalise. We see the RBA beginning to cut in August 2024, returning the cash rate to around 3% by early 2025.
  • The labour market has remained very tight with the unemployment rate still at 3.5% in June. This should continue to support wage growth in the near term, and we expect a strong WPI print for Q3 with growth around 4.2% y/y by end-2023.
  • As the economy slows, however, softening labour demand should see the unemployment rate rise back to 4% by end-2023 and around 5% by end-2024. We expect this easing to be enough to bring wages growth back to around 3.8% in 2024.
  • With the economy slowing and global supply chain issues largely resolved, inflation has started to moderate, falling to 6% y/y in Q2. We still see significant pressures on the services side with Q3 CPI likely to show a re-acceleration before further gradual easing to around 3% in headline terms by end-2024. The easing in the labour market and wage growth will play a part in this but profit margins will also be squeezed as firms face into an environment of much softer demand.
  • House prices have continued to rise and have now regained around half of the fall seen between mid-2022 and early 2023. Rents are also still rising strongly though vacancy rates have started to edge back up. Building activity is still set to ease further although approvals have started to stabilise after falling early in the year.

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

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