The Forward View – Australia: June 2022

Higher inflation, higher rates & slower growth ahead.

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Overview

  • We have lowered our GDP forecast for this year and next, upped our near-term inflation outlook and incorporated a new, front loaded rate track for the RBA. Our outlook for the labour market is broadly unchanged in the near term, with unemployment expected to continue to decline and wage growth to pick up, but we have increased the unemployment rate profile further out.
  • GDP is now expected to grow by 2.7% over 2022 (was 3.4%) and a below-trend 1.8% in 2023 (was 2.1%). We expect growth of around 2.0% in 2024. After incorporating the base effects of the national accounts, the key changes to our activity outlook come through softer consumption growth.
  • We have also upped our inflation outlook for Q2 and Q3 on the back of the unfolding energy price shock as well as greater downstream impacts of floods on food production, while the overall impact of the reduction in fuel excise is no longer expected to be as large. That sees headline inflation peak somewhat above 6% y/y in Q3 and underlying reaching a very high 5% y/y.
  • Given the strength in labour demand indicators we continue to see the unemployment rate falling to around 3.5% in late 2022, but slower growth in 2023 should see unemployment around 0.2ppt higher in 2023 and 2024 – now expected to be 4% (was 3.8%) at the end of the forecast horizon.
  • The stronger inflation outlook and the RBA’s post meeting statement mean we now expect a stronger front loading of rate increases as the RBA moves the cash rate towards neutral. Our new profile sees the cash rate at 2.1% by end 2022 and 2.6% at end 2023.
  • We also now expect larger falls in house prices over the next 18 months, led by weakness in Sydney and Melbourne but with the expectation that higher rates will impact all capitals. Overall, we see house prices ending 2022 down around 2% and then around 15% lower across 2023.
  • Ultimately, we see a “soft landing” for Australia with the impact of supply constraints unwinding while wage growth reaches a sustainable limit. GDP growth is expected to slow, but remain positive and we don’t expect unemployment to rise materially above a level consistent with “full employment”.
  • However, there are a number of risks to this outlook. The impact of supply shocks may bleed further into inflation expectations and wage bargaining – forcing the RBA into a more restrictive stance. The global outlook has also deteriorated on the activity side.
  • In this month’s theme we look at the potential impacts of higher interest rates and elevated inflation on household income, and the implications for consumption growth.

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