Overview

• Our forecasts are broadly unchanged this month though we have tweaked our near-term GDP and inflation outlook and extended to 2024. Overall, we still see the activity growing strongly this year and the labour market strengthening further, but also expect inflation to accelerate faster in the near-term.
• GDP is expected to grow by a strong 3.4% during this year – supported by healthy growth in consumption and ongoing gains in business investment. In 2023 we expect growth to slow to 2.1%, before tracking at around trend rates at 2.2% in 2024.
• Similarly, the labour market has been strong and is expected to strengthen further. We expect the unemployment rate to fall below 4%, reaching 3.5% by mid 2022, and remaining there through 2023. Consequently, wage growth is expected to pick up rising to over 3% y/y in 2023.
• We have slightly strengthened our near-term inflation outlook ahead of the Q1 CPI release. We see a core print of around 1.1% q/q (3.3% y/y) for Q1 which will see underlying inflation above the RBA’s target band for the first time in 12 years. We now expect a print of a similar magnitude in Q2 which would see underlying inflation peak at a very high 3.9% in the middle of the year.
• Notably, these forecasts and the RBA’s change in tone have seen us bring forward the first expected cash rate hike to June with follow-ups in July, August and November. We see a slower pace of increase in 2023 and 2024 but expect the cash rate target to reach 2.25% by the end of our forecast horizon. Consistent with the need to begin normalising policy, we see the RBA allowing its holdings of bonds to roll off as they mature with no reinvestment – announced in May.
• While we continue to expect a very strong economic performance in the near-term and the RBA to begin normalising policy at a gradual pace, a number of risks remain. Globally the pandemic remains a risk with new variants a possible disruption to activity as well as supply chains more broadly. The geopolitical tensions in Europe also remain a risk.
• Domestically, it could be that the labour market continues to tighten faster than expected – with the activity outlook and indicators of labour demand still very strong and population growth yet to fully recover. Were that to be the case, the unemployment rate could fall to the low 3s, requiring faster transition to neutral (or above) by the RBA.

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