Overview

• Our forecasts for the economy are broadly unchanged this month. Following a relatively healthy outcome for growth of 2.7% over 2022 – which saw GDP rise 7.2% above its pre-COVID level – we expect growth to slow sharply to 0.7% in 2023 and 0.9% in 2024, well below trend.
• Slower growth should see labour demand growth soften and the unemployment rate drift up to around 4.7% over the next two years. While the labour market is currently tight, and wage growth is likely to accelerate to around 4%, the rise in the unemployment rate will eventually see an easing in wage growth.
• Inflation is expected to continue to moderate over the next two years – but only reach the top of the RBA’s target band by late 2024. Wage growth and other domestic pressures will increase in importance as global factors wane. For now, despite the tight labour market, wage growth and broader labour cost measures do not look inconsistent with at target inflation. Inflation expectations will continue to be a risk as inflation remains high.
• We still expect the RBA to lift rates at each of the next two meetings, taking the cash rate to 4.1%, and holding there until cutting in early 2024. There is some near-term downside risk to this view with the RBA becoming increasingly data dependent as it nears the peak.
• The economy is now entering a more challenging phase, but it does so from a position of strength. Activity has recovered strongly, and the labour market is still very tight. Our business survey and official labour market data suggest that the economy has remained resilient through the early part of 2023.
• Uncertainty remains elevated. How quickly inflation moderates is a key unknown, as domestic pressures – including wage and rents growth continue to build. On the other hand, the full impact of the rapid tightening in monetary policy is yet to be seen, and there is a risk that activity could slow more sharply than expected.
• These risks are common across many advanced economies. With inflation remaining sticky and central banks moving further into restrictive territory volatility remains high. This is highlighted by the recent ructions in the US banking sector and at Credit Suisse – with potential spillovers for Australia via lending conditions and confidence.

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