• Our activity, labour market and inflation forecasts are unchanged this month.
• Growth is expected to return to trend over the next 18 months, with unemployment remaining low and inflation settling at 2.5%.
• A more cautious RBA means we now see cuts in August, November and February, for a terminal rate of 3.1%.
• Global factors remain a risk to the activity and labour market outlook, though there is little evidence of an impact so far in domestic data.

Domestic data flow over the past month has continued recent themes. The April and May Monthly CPI Indicator suggests little incremental progress on disinflation this quarter, pointing to a quarterly outcome slightly stronger than we (and the RBA) had expected. That said, inflation will continue to moderate in annual terms. Labour market data suggest that labour demand remains resilient, and the unemployment rate remains low. The labour market data had been challenging our forecasts that the unemployment rate would gradually increase, but the increase in June supports our view that the labour market has cooled over the past 12 months.

Activity data has been mixed. Measures of household spending point to another weak quarter of household consumption growth but have shown an improving trend through the quarter. NAB Business survey data showed a spike in conditions, confidence and capacity utilisation in June, and the quarterly survey showed an uptick in investment intentions, while also pointing to ongoing resilience in labour demand.

Our outlook for the economy is unchanged. We expect another year of below trend growth, but for GDP growth to accelerate to around trend over 2026. We expect the unemployment rate to drift up modestly, peaking at 4.4% in late 2025. Despite the small upside surprise to inflation in the quarter, we still expect inflation to settle around 2.5% in H2 2025.

However, despite the elevated global risks to activity (and the likelihood that additional US tariffs would be disinflationary for Australia) the RBA continues to focus on the domestic data flow. We see the RBA remaining cautious, cutting with a quarterly cadence, taking the cash rate to 3.1% by early 2026.

We see the risks around our rate track as broadly balanced. That said, the uncertain global backdrop sees a risk of faster and deeper cuts, although the domestic data suggests that the economy has remained resilient to date.

For further details, please see Forward view Australia (July 2025)