The Forward View – Australia: July 2021

Lockdown disruptions but expect recovery to continue.

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Overview

  • The current virus outbreak in NSW and associated lockdowns/border closures highlights the significant uncertainty around economic forecasting at present. We have made a modest tweak to our forecasts for GDP based on current developments. At this stage we do not see the recovery as having been derailed, given the significant momentum heading into the current disruptions but there are some downside risks to our forecasts if we see material extension to the lockdown.
  • We see GDP growth of 5.0% in 2021, 2.5% in 2022 and 2.2% in 2023. With aggregate activity having largely recovered, we see a normalisation in growth from here – and quarterly GDP prints of less than 1%.
  • In the near-term we continue to expect GDP to be supported by both dwelling and business investment growth as well as the ongoing recovery in services spending.
  • We expect the unemployment rate to continue to decline, reaching 4.8% by end 2021, before shifting down more gradually over the next two years – falling to 4.6% by the end of 2022 and 4.2% at the end of our forecast horizon. While highly uncertain, we see full employment consistent with an unemployment rate in the low 4’s. Nonetheless, we do expect wage growth to pick-up from here – tracking by around 3% at end 2023.
  • We continue to expect inflation pressures in the near term due to the unwinding of pandemic-related impacts last year as well as isolated cases of wage and inflation pressure due to supply chain disruptions and closed international borders.
  • We acknowledge the risk that current set of transitory factors may become more permanent. This could happen in two ways. Firstly, higher inflation outcomes may lead to high inflation expectations in the wage bargaining process, which would see higher wage growth persist. Secondly, high wage growth in some sectors may see spill overs to other sectors. To date, however, there is little evidence of this unfolding and abstracting from the short-term volatility in inflation, the wage/inflation dynamic will only see a gradual building of pressure over time.
  • Following the RBA meeting last week, we have affirmed our view that the cash rate will remain on hold until early 2024. We see this as a balanced view and acknowledge that further upward surprises to activity and the labour market, or RBA reverting to being forward-looking, could see the first increase come in late 2023. On QE we expect the RBA to continue to taper gradually with total purchases after September of around $100bn.

For further details, please see The Forward View Australia – July 2021