Overview

• The key change to our forecasts over the past month was the shift on our view for the timing of the first RBA rate cut. We now expect the first cut to occur in May 2025 – though we still expect the RBA to ultimately cut rates by 125bps over the subsequent year or so. We acknowledge the upside risks to rates in the near-term, but we ultimately see the RBA maintaining its strategy of trying to hold onto labour market gains. That sees the need to remain on hold for longer.
• On inflation, we have firmed up our pick for Q2 – now expecting 1.0% q/q (4.0% y/y) for the trimmed-mean and 1.0% q/q (3.8% y/y) for headline. Nudging up the profile sees underlying inflation end the year at 3.7% y/y.
• Our outlook for growth is broadly unchanged. Growth is expected to remain well below trend this year but improve to around its trend rate over 2025 and 2026 at ~2.25%.
• The unemployment rate is still expected to rise to around 4.5% by end 2024 and stay there through 2025. As has been our view for some time, this will largely reflect a cooling in labour demand amid still-strong population growth, rather than an outright decline in employment.
• In terms of the recent data flow, we see growth as having remained soft in Q2. ABS retail sales data and our internal transactions data suggest another quarterly decline in real retail sales. Our Monthly Business Survey measure of business conditions also points to a further loss of momentum – falling further below average in June.
• Inflation has remained higher than we (and the RBA) expected, although the market services components of the monthly CPI indicator – though still high – show a clearer easing trend. That said, overall inflation remains important and has shown little further moderation in H1 2024.
• Pressure in the labour market continues to ease, with forward indicators continuing to soften. That said, job vacancies remain elevated pointing to ongoing resilience in the near-term.

For further details, please see The Forward View Australia (July 2024)