Overview

• The Q3 national accounts showed a smaller hit to activity than we had expected but we continue to expect a very strong snap back in activity in Q4 with GDP rising 2%. This would see the pre-Delta level of GDP recovered in early 2022.
• We expect above trend growth to continue through 2022 (4.1% through-the-year) before growth slows to around trend in 2023 (2.5%).
• We also expect a rapid recovery in the labour market, with the 330k jobs lost due to shutdowns in mid-2021 recovered by the end of Q4. Beyond this, we see further gains in employment through 2022, enough to see the unemployment rate fall to 4.1% by December 2022 before edging lower to around 3.8% over 2023.
• In the near term, we see the rebound in growth being driven by household consumption as well as the ongoing effects of policy support – both dwelling and business investment are expected to continue to lift. Government spending will also likely support.
• Further out, the opening-up of state and international borders and shift to living with COVID will see the balance between services and goods spending normalise, and the impact of stimulus will wane. Underlying population and productivity growth will then become important drivers of growth.
• On monetary policy, we see the RBA announcing the end of QE at the February meeting. The strong rebound in the labour market, deteriorating liquidity in the bond market and the pullback in stimulus by overseas central banks are likely to drive this decision. We continue to see the RBA lifting rates from mid-2023.
• We have also extended our forecasts for house prices to 2023 – and expect a modest fall of around 7.5% with affordability constraints beginning to bind and rates rising in the second half of the year following growth of 22% in 2021, and 5% in 2022. House price growth has slowed recently, and the risk of further macroprudential tightening remains in play. This could see sooner/sharper falls if lending is curtailed.
• While we are optimistic (as is the RBA) on growth over the next year or so, a number of uncertainties remain, including the risk from the Omicron variant. The tightening in the labour market should lead to a pickup in wage growth and eventually inflation. However, the speed and magnitude of this is a key unknown. The wage setting process is based around long term contracts and dependent on inflation expectations. The level of “full-employment” is highly uncertain as is the sensitivity of wages to labour demand. Further, the ability of businesses to pass on cost pressures and maintain margins will be important. Against this, strong demand and labour shortages may shift the dial in the other direction – at least in the short-term.

For further details, please see The Forward View Australia (December 2021)