July 18, 2023

The Forward View – Australia: July 2023

A slow second half, but persistent inflation

Overview

  • Our growth and labour market forecasts are broadly unchanged this month, though we have revised up our near-term expectations for the CPI slightly as we have refined our “bottom-up” forecasts ahead of the Q2 CPI release.
  • On inflation, we have nudged up our expectations for trimmed mean in Q2 (released next week) and Q3. We see headline inflation printing at 0.9% q/q and trimmed-mean printing at 1.1% in both Q2 and Q3.
  • We still expect quarterly GDP growth to be flat over the next three quarters, with growth of just 0.5% over 2023 – the slowest pace of growth outside of the pandemic since the 1990s – and 0.9% in 2024. Both would be well below trend.
  • The labour market is also expected to weaken through the second half, with the unemployment rate rising from the near 50-year low of 3.6%. The sharp slowing in growth will see unemployment reach 5% by end 2024. This is a significant turnaround from the outcomes seen over the past year or so, but broadly around pre-pandemic levels.
  • That said, wage pressures are expected to continue to build – reaching around 4% y/y before the easing in the labour market sees some of the wage pressures abate.
  • Though the RBA remained on hold, we still see two further hikes – pencilling in August and September. There is increasing evidence that rates are working to slow demand, though inflation remains high and services inflation will pressure the RBA in the near term.
  • We have raised our dwelling price forecast given the considerable resilience in the market, and now see a 4.5% increase over 2023. However, uncertainty is high.
  • In terms of activity, building commencements rose in Q1 after falling in recent quarters. There appears to have been some easing in supply and cost constraints in the construction sector. That said, they remain low relative to recent standards. The pipeline of work outstanding is still very elevated with around 6 quarters of work outstanding. However, the recent run of weaker dwelling approvals should see this normalise over the next year.

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

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