Overview

• As the full impact of rate rises continues to flow through, we are seeing increasing signs that the activity is slowing sharply after a very strong period of growth in 2022. The national accounts confirmed that consumer spending slowed in Q1, the business survey is now showing a sharp easing in conditions, with negative reads for confidence and forward orders, while building approvals are very weak.
• The key changes to our forecasts this month are a small downgrade to GDP growth this year and next, a higher unemployment rate by year’s end and we also now see the cash rate peaking at 4.6% by August.
• We see just 0.5% growth over 2023 and have pulled back our expectation for 2024 to a touch below 1%. Household consumption is expected to plateau through mid-2023 before only picking up modestly in early 2024.
• For now, the labour market has remained resilient though it typically lags growth – meaning we expect more of a pickup in the unemployment rate in H2 2023. We now see the unemployment rate reaching 5% by the end of 2024.
• Our inflation forecasts are broadly unchanged. We expect the quarterly pace of inflation to ease gradually from here – but this will be highly dependent on how goods disinflation is passed through and the extent to which domestic services pressures continue to build.
• We now see the cash rate rising to 4.6%, and we expect it to remain well into restrictive territory until mid-2024 when the RBA begins to ease back towards neutral. Of note is that around 75bps of hikes that the RBA has delivered are yet to flow through to mortgage payments.
• With a tight labour market, accelerating wage growth and ongoing pass through of cost pressures, inflation remains a key risk. This is consistent with the global experience of ‘sticky’ inflation following an initial period of moderation. As policy makers move rates higher, trying to calibrate policy amidst elevated uncertainties, the risks around growth continue to rise. Recessionary forces are gathering, albeit this is still not our central case.
• With policy now expected to move further into restrictive territory we see growing risks globally and domestically for both activity and the labour market.

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