Overview

• Our overall view of the economy is largely unchanged – with growth tracking through a very weak period and the expectation that the labour market will soften further through 2024. We continue to expect inflation to moderate – though this process has not been smooth – and the RBA to have the scope to begin easing rates later in the year. With GDP growth rebounding somewhat in H2, unemployment stabilising at around 4.5% and inflation returning to the target band by late 2025 we continue to see a relatively soft landing.
• Indeed, GDP grew just 0.1% q/q in Q1, to be up 1.1% y/y. This was in line with our forecasts but, in the detail, the picture has changed somewhat with revised estimates of overseas travel leaving household consumption growth looking stronger at 1.3% y/y. The softness in the quarter came largely from private investment – especially construction – with offsetting movements in trade and inventories.
• Higher frequency indicators, including business conditions in the NAB Monthly Business Survey, suggest growth will likely be no better in Q2. We continue to expect a pickup in activity in the second half of the year with easing inflation and tax cuts supporting households. On balance our year-ended growth forecast is now marginally lower at 1.3% for 2024, with growth still likely to return to trend rates around 2¼% beyond that.
• Despite the slowing in growth, the labour market has remained resilient with strong employment growth seeing the unemployment rate at 4.0% in May. We continue to expect further gradual easing in the labour market, with the unemployment rate rising to around 4½% by end-2024. This is consistent with further easing in the pace of wage growth.
• The question remains how long rates will need to remain at their current restrictive level to see inflation back into the target range. We still see a first cut in November but the exact timing is heavily data dependent. Underlying inflation remains around 4.0% y/y and the data flow from here will be critical – especially the Q2 CPI out in late July. So too will be the assumed kick in growth in H2 2024.

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