Overview

• Following the release of the Q1 national accounts we have updated our forecasts for activity and the labour market. We now see year-average GDP growth of 5.1% in 2021, 2.6% in 2022 and 2.2% in 2023. In year-ended terms we see growth of 3.9% this year, 2.4% in 2022 and 2.2% in 2023.
• We expect the unemployment rate to continue to decline, reaching 4.9% by end 2021, before shifting down more gradually over the next two years – falling to 4.7% by the end of 2022 and 4.5% at the end of our forecast horizon.
• The economy is in a much better position than expected even 6 months ago. The national accounts confirmed that activity has now more than recovered its pre-COVID level and that the sectors that were most impacted by the virus continue to recover.
• We expect the key dynamics evident in the Q1 data to continue to play out. Dwelling and business investment are expected to be key supports to growth in the near-term, while services consumption will continue to recover. Goods consumption is expected to normalise over time, but at a pace that is uncertain.
• We forecast inflation to spike in the near-term as prices normalise following a range of pandemic-related impacts a year ago. It is also likely that we will see a bout of transitory inflation due to the disruption of some supply chains, pockets of labour shortages as well as the temporary boost to demand for some goods.
• With these temporary effects expected to fade over time, wage growth will be a key determinant of inflationary pressure at the current long-term forecast horizon. We see inflation rising to 2% by end 2023 which would broadly see inflation returning to the bottom of the target band. The labour market would likely need to remain tight for some period in order to see wage growth above 3% and a sustainable rise in inflation to between 2-3%.
• On monetary policy we expect the RBA to hold back on rolling the YCC target of 0.1% to the Nov-24 bond and to taper the QE program to $75bn over a 6-month period once the current tranche is completed. The RBA will also undertake further QE purchases with the size and shape of following programs to be determined by the final size of the next tranche and the evolution of economic and market conditions through the second half of 2021. Please see our updated monetary policy view released last week for more details.

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