Overview

• Our forecasts for growth are broadly unchanged following the release of the Q3 national accounts, though we have nudged down our forecasts for underlying inflation and the unemployment rate in the near-term.
• We still see growth picking up in early 2025 after a period of weak growth through late 2024. A rebound in consumer spending growth will drive overall GDP growth of around 2¼% over each of the next two years.
• The unemployment rate is expected to peak around 4.3% before edging down to around 4.2% over 2026 as the economy stabilises around its potential. That implies that employment growth remains positive over the next two years and that the unemployment rate settles around 1ppt below pre-COVID levels.
• We now see trimmed mean inflation of 0.6% q/q in Q4. Beyond that, inflation is expected to gradually ease back towards the mid-point of the RBA’s target. We see underlying inflation back in the top half of the band by late 2025 (2.7%), and around 2½% by early 2026.
• On rates, the RBA Board’s pivot at the December meeting skews the risks to earlier on our May call. With the upside risks to inflation fading, the RBA will be able to continue its strategy of minimising any slowdown in the labour market. Importantly, the RBA sees rates as restrictive and will look to ease as it gains further confidence that inflation is sustainably on track towards 2.5% over the next 18 months.
• The path to an RBA cut in February relies on the RBA reassessing their view of how far the labour market and activity are from balance. Their December meeting showed the beginnings of a shift, and the detail of the Q4 CPI print will be important for updating their view of how binding capacity constraints remain. Still, we expect the growth outlook and still low unemployment rate to create little urgency to adjust policy and remain of the view that May is a more likely starting point.
• Overall, our outlook is still very much for a soft landing, with the slowing in population growth offset by an improvement at the individual level as pressures on the household sector ease. That said, business investment growth is slowing and there are only tepid signs of a recovery in dwelling investment. Alongside consumption, both of these components will need to see some improvement for the private sector to gain momentum.

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