Overview

• Recent data flow shows that the economy has little momentum, with the labour market still healthy but cooling and inflation gradually moderating.
• Our outlook is broadly unchanged. We see below trend growth persisting this year, though expect a consumption led improvement in H2 2024, and around trend growth over 2025. There will be a rotation away from population supported growth to a recovery at the individual/household level, as headwinds to household budgets wane – though consumer reactions will be important here.
• Both the labour force data and the wage price index show that the labour market continues to gradually cool but remains healthy. The unemployment rate has now risen ~0.7ppts from its trough to 4.2% but employment continues to match strong population growth. We see the unemployment rate gradually drifting higher, reaching 4.6% by end 2025 as labour demand cools further.
• The Q2 CPI confirmed that the moderation in inflation slowed over H1 2024 with the easy gains from recovering supply chains fading and services inflation remaining higher. That said, we expect inflation to continue to moderate, with underlying inflation falling to 3.5% by end 2024 and 2.7% by end 2025.
• Some pressure in the housing market appears to be easing with rents and price growth nudging down over recent months. That said, the demand/supply imbalance will continue to support both prices and rents in the near term.
• On rates, both the data flow and recent communications from the RBA point to an extended pause, with cuts unlikely to occur this year. We continue to pencil in May 2025 for the first cut but see all the meetings in H1 2025 as live.
• Overall, our forecasts continue to see a soft landing for the economy with growth returning to trend and inflation moderating without a more substantial downturn in activity. Importantly, the labour market will remain relatively healthy with the unemployment rate peaking a little below its pre-COVID level.

For further details, please see The Forward View Australia (August 2024)