• The economy remains resilient and we still expect a soft landing.
• Our forecasts are largely unchanged, with growth returning to trend this year (~2.25%), unemployment edging up to 4.25% and underlying inflation settling around 2.5% from mid year.
• We expect rates to fall gradually but this is contingent on a realisation of our CPI forecasts which are softer than the RBA’s February forecasts.

The economy continues to play out largely as we expect. The major data since our last update has been the NAB Monthly Business Survey, retail sales and this week’s labour force and wage price index data.

While the NAB Monthly Business Survey softened in January across most activity variables, the ABS labour force data showed ongoing resilience. The Q4 wage data which also showed some gradual further easing also align with our view that unemployment in low 4% range is sustainable.

Accordingly, our forecasts are largely unchanged this month, though we have increased our Q4 pick for GDP, now 0.6% q/q (1.2% y/y), with consumption looking to have risen more strongly than expected in late 2024. An ongoing recovery in consumption will be important to see stronger growth sustained.

The bigger picture remains that we see GDP growth returning to trend this year (2.25% y/y) and staying there as household spending growth recovers – though this will also require an uptick in both building activity and business investment growth.

We see employment growth remaining positive and the unemployment rate rising slightly from here but levelling off at around 4.25% – which we think is sustainable.

Together, this sees inflation return to, and settle at, the mid-point of the target from around mid 2025. But there will need to be ongoing cooling in services inflation and sustained easing in the housing cost components.

Consequently, and following the RBA decision this week, our rate track is unchanged with a gradual series of cuts taking the cash rate to 3.1% by early 2026. That said, we see the risks skewed to an even more gradual and shallower cutting phase should inflation not settle as neatly around 2.5% as we expect.

For further details, please see The Forward View Australia (February 2025)