Overview

• Based on recent upside surprises in the data we now expect a lower unemployment rate and higher inflation in the near-term, while our forecasts for activity remain broadly unchanged. As a result, we have also brought forward our cash rate profile.
• The Q4 national accounts confirmed that consumption rebounded very strongly as the Delta lockdowns eased. With the savings rate still high but beginning to decline, household consumption will likely be well supported in coming quarters.
• The accounts do not materially shift our outlook for the pattern of growth. We expect ongoing strength in overall consumption spending (albeit slightly disrupted in Q1 by Omicron and, more recently, floods). We continue to see dwelling and business investment as well as government spending supporting growth in the near term, while trade is expected to be a small drag on growth.
• Overall, that sees growth of 3.4% in 2022 and closer to trend growth of 2.1% in 2023. However, the headline figures will mask a rebalancing in goods and services spending, as well as a recovery in services trade.
• The strength in activity and strong labour demand (evident in both the NAB Business Survey and job vacancies/ads) points to the unemployment rate declining further. We now see the unemployment rate falling below 4% by March and reaching 3.5% by mid-2022 – and staying there. This will eventually see a strengthening in the pace of wage growth.
• For us, the strength in activity and tighter labour market then shifts the focus squarely to the nominal side of the economy in terms of the RBA entering a phase of rates normalisation as well as key decisions on unwinding the balance sheet.
• We expect strong inflationary pressure to persist in the near-term and have revised up our forecasts for the CPI. We now see underlying inflation prints of around 1% in both Q1 and Q2 – taking the year-ended rate to 3.7% by mid-year. Our headline CPI forecasts are also higher, reaching 4.2% by Q3 2022 (on the back of oil prices) before easing to 2.6% by end 2023.
• The upgrade to our underlying CPI forecasts alongside an even tighter labour market has brought forward our call for rates “lift-off”. We now see the RBA lifting the cash rate by 15bps in August, with 25bp follow ups in September and November.

• The key risks for the economy have shifted significantly over the past 6 months or so. Lockdowns and border closures appear to now be in the rear-view mirror and the key uncertainty is how quickly spending patterns, international services trade and population growth normalises. In addition, the war in Europe looms, posing risks on both the activity and nominal sides of the economy.

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