Overview

• We have revised up the expected rebound in Q4 GDP on the back of stronger than expected partials but have pulled down Q1 2022 as the spread of omicron weighs on the economy through both consumer caution as well as disruption to business.
• Overall, that means we see above-trend growth of 3.7% during 2022 and closer to trend growth of around 2.5% in 2023. Growth will be supported in the near-term by a pick-up in household consumption, and further growth in both business and dwelling investment. Government spending is also expected to continue to support the economy through 2022.
• We see ongoing tightening in the labour market, with strong employment demand continuing to drive the unemployment rate lower from the 4.2% reached in December. Broader measures of labour market capacity have also tightened, with the underemployment rate falling to its lowest level in 13 years. Overall, we see the unemployment rate ending 2022 at 3.8% and 2023 at 3.7%.
• Further tightening in the labour market should see wage growth continue to rise from low levels – though only gradually. An update on the WPI will be released later in February but broader measures of wage pressure will become more important in assessing general inflationary pressure.
• Headline inflation has continued to track well above the target band, rising to 3.5% y/y in Q4. Underlying inflation rose to 2.6% y/y in Q4 – the second print within the target range in 6 years. The CPI continues to be buffeted by a range of temporary factors as a result of disruptions to global supply chains and elevated goods demand. We expect this to eventually resolve, but some of the unwind will be offset by wage growth. That sees underlying CPI around 3.4% by Q3 2022, but 2¾- 3% into late 2022 and 2023.
• On monetary policy, we have brought forward our expectation for rate hikes, with lift-off now likely in late 2022 followed by steady increases through 2023 and 2024 as the RBA moves to normalise policy.
• In the near-term, the key risks continue to be virus-related disruptions and for the labour market, a faster than expected tightening. Further out, the pace and size of the recovery in migration will be important while the rebalancing of goods and services spending will affect trade and consumption.
• Overall, the key themes for 2022 will likely be: 1) the true level of full-employment and how wage growth responds; 2) how quickly the balance between goods and services spending is restored; 3) if and when supply chain pressures begin to abate; and 4) whether the RBA continues to wait for evidence on more sustainable inflation or is pressured to hike sooner by strong headline prints and concern about inflation expectations.

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