The Forward View – Australia: July 2022

Interest rates & inflation to weigh on the consumer.

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Overview

  • To square up the risks around our forecasts we have nudged up our inflation forecasts in the near-term, included further front loading on our forecast cash rate profile and softened growth slightly in both 2022 and 2024. Consequently, this sees unemployment rise to a slightly higher level by end 2024.
  • Ultimately, we have not changed our view on the underlying trajectory of the economy and inflation but see greater risk around household consumption growth going forward as the impact of higher prices and interest rates begin to weigh. Weaker global growth will be an additional headwind.
  • GDP is now expected to grow by 2.3% over 2022 (was 2.7%) and a below-trend 1.8% in 2023 (unchanged) and 1.8% in 2024 (was 2.0%). Consumption is expected to slow in H2 2022 while dwelling investment remains high (but volatile) and business investment ekes out a small gain.
  • We have again upped our inflation outlook slightly, for both the headline and core measures. Our survey continues to point to a very strong outcome in Q2, while anecdotal and other price data point to slightly stronger outcomes than we had previously expected in Q3 and Q4. Ultimately, we expect both measures to peak Q4 – with headline reaching 7.2% y/y and trimmed mean rising to 5.4% y/y.
  • We have tweaked our labour market forecast and now expect unemployment to trough around 3.7% in 2022 before drifting up to 3.9% in 2023 and 4.3% in 2024. Despite this small deterioration we consider a level around 4.2% as consistent with full employment.
  • We have slightly pulled forward our expectations for the cash rate, now expecting an additional 25bp increase in September, which sees the cash rate target at 2.35% by November before a final 25bp increase to 2.6% in February 2023 – three months earlier than previously forecast.
  • As rates rise quickly, we continue to watch the most interest sensitive sectors for signs of adjustment. The housing market has continued to soften with price falls continuing in Sydney and Melbourne while growth is slowing elsewhere. We are also watching consumption closely as higher rates and rising prices will increasingly weigh on spending, but are yet to see a material slowing.
  • With concerns over global growth rising as central banks tighten policy and the impact of the energy price shocks continue to make their way through the global economy, we look at the key channels by which a global slow-down will impact the domestic economy.
  • Confidence and financial channels represent the most immediate risk, while a slow-down in global trade reducing the demand for our exports will also be a factor.

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