Overview

• Our forecasts are little changed this month. The national accounts confirmed that the economy remained resilient in Q3, and the labour force data continues to reflect a healthy but tight labour market. That said, leading indicators of the labour market have eased slightly, while high frequency transaction data suggest that spending growth has slowed.
• Following growth of 0.6% in Q3 we expect a softer print of around 0.3% in Q4. We expect slower growth to persist into 2023 and 2024– which will see growth in annual terms slow to below 1%. The slowing in growth will mainly come via weaker growth in household consumption.
• Our forecasts for the labour market are unchanged – we still see the trough in the unemployment rate in Q4 at just below 3.5% before slower growth over the next two years is unable to absorb the recovery in population growth. That said, we only expect unemployment to rise just above a level that is consistent with full employment.
• We continue to expect inflation to peak in Q4 before easing over the next two years – reaching 3.2% by the end of 2024. Global indicators of inflation pressure have eased and will likely begin to flow through. Domestic pressures continue to build but are not yet inconsistent with at-target inflation.
• Following the 25bp increase in the cash rate at the December meeting, we see the RBA lifting rates at each of the next two meetings which will take the cash rate to 3.6% before pausing as global growth slows and inflation softens.
• The risks around our forecasts are largely unchanged. Should wages react more strongly to a tight labour market or inflation remain sticky, the RBA could lift the cash rate higher, slowing growth further. Alternatively, there is some risk that the RBA takes a slower path to 3.6% if the data slows in early 2023.
• The national accounts measure of household income and spending continue to reflect the dynamics at play in the economy. Income growth accelerated in the quarter – on the back of stronger wage growth – but slowed in annual terms as the impact of fiscal support waned and interest rates began to weigh on disposable income.

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