• The economy appears to be gaining momentum more slowly than expected 6 months ago.
• The labour market has remained resilient and forward indicators remain healthy.
• The inflation outlook has become more balanced and will allow the RBA the scope to normalise policy, while remaining alert to any downside risks to the labour market.

The key domestic data over the past month show that private sector growth may be recovering more slowly than expected 6 months ago. The Q1 national accounts pointed to some loss in momentum in household consumption growth and an ongoing softer trend in business investment growth relative to the strong outcomes over recent years. Early data for Q2 point to a similar trend, with consumer spending measures volatile month-to-month but on average soft, and the NAB Monthly Business Survey still showing below average business conditions.

We forecast growth of 1.7% over this year and around 2¼% next year. This forecast embodies an improvement in household spending growth, a continued rise in dwelling investment and more consistent business investment growth. We expect public demand to continue to rise, though at a slower pace than over recent years.

While growth has picked up more slowly than expected, the labour market has remained tighter than forecast 6 months ago. We continue to see the unemployment rate rising to 4.4% by late 2025 and then stabilising at around 4.25% by end 2026.

Underlying inflation is expected to settle around the middle of the RBA’s target band by late 2025. We see the risks around our forecast as broadly balanced. Productivity and housing constraints point to upside risk over the next 18 months given the balanced starting point for potential output but these risks are offset by global factors that represent a risk to growth, the labour market and therefore, consumer demand.

For us, the key policy risk is a slower than expected pickup in household consumption growth as population growth slows and real incomes recover more gradually than expected. These dynamics could lead to a faster increase in unemployment alongside less ability for businesses to pass on cost pressures. However, while inflation is expected to settle around the middle of the target band, we see both upside and downside risks amid elevated global uncertainty and volatile domestic data flow.

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