Overview

• The economy looks to have remained resilient in Q4 with real retail sales declining by only a small amount, business conditions remaining well above average and the labour market remaining strong. We see a Q4 GDP print of around 0.9% supported by strong net exports, still rising consumption and marginal gains and dwelling investment and public spending. Key partials will be released later this week and next week.
• Looking forward, we see growth slowing sharply as consumer spending comes under pressure from both higher rates and inflation. Dwelling construction and business investment are also expected to fall modestly this year. Public spending and net exports will partially offset this weakness, in the near term at least.
• On GDP, we see the quarterly rate of growth slowing to around 0.1% in mid-to-late 2023. That sees through the year growth slow to just 0.7% in 2023 and 0.9% in 2024 before around trend growth of 2.2% in 2025.
• The unemployment rate is expected to drift up to 4% by end 2023 and 4.7% by end 2024. That said, the level of employment is expected to keep growing. Wage growth is expected to reach around 4% before easing off as unemployment rises.
• Inflation looks to have peaked in Q4 at almost 8% in headline terms and 7% in underlying terms. The easing in global pressures should flow through to prices in 2023. However, how quickly and where inflation settles will depend on domestic inflationary pressure which is building – a key component of that being wage growth. We see inflation falling to 4.25% by end 2023 and back to the top of the RBA’s target band of 2-3% by end 2024.
• We recently revised up our outlook for the cash rate in the near-term and now expect it to peak at 4.1% in May 2023 and stay there until the RBA begins cutting in early 2024. We see neutral as broadly around 3% and therefore expect rates to drift back towards this level as the economy slows.
• The key macro dynamics this year will be how households respond to higher interest rates, how quickly inflation moderates, and relatedly, how labour market dynamics flow through to wage growth. Population growth is also elevated at present and will likely continue to support to activity.

For further details, please see The Forward View Australia (February 2023)