Overview

• After Q4 GDP data confirmed a very subdued end to 2023, we expect growth to remain below-trend in the near term – but activity should improve later in the year as the pressure on households eases with rate and tax cuts as well as a moderation in inflation.
• The National Accounts release showed growth of just 0.2% q/q in Q4 – in line with NAB’s forecasts – with annual growth falling to 1.5% y/y. Flat consumption was the defining story of the year, but declining dwelling investment and slowing business investment growth were also notable. Public demand and recovering exports provided offsetting support for growth.
• We continue to expect growth to remain below trend at 1.7% over 2024, before improving to around 2¼ % in 2025 and 2026. Household consumption will remain subdued in the near term but should pick up later in the year, while housing and business investment are also likely to be subdued before turning up later in the year.
• Households will continue to be supported by strong nominal income growth with hourly wages rising at their fastest annual pace since 2009. We expect wage growth to stabilise from here as the labour market eases further over the year ahead, and continue to see the unemployment rate peaking at 4.5% by end-2024.
• On inflation, price growth measures in the national accounts continued to ease in annual terms, albeit by less than CPI. Nonetheless, the subdued pace of demand growth and ongoing supply-side recovery – including the labour supply – should see further gradual progress towards the RBA’s target band. Our profile has inflation returning to just over 3% by end-2024 and near the middle of the RBA’s target band by end-2025.
• With the effects of restrictive monetary policy evident in activity data and inflation trending in the right direction, we see further rate rises as unlikely. A lift in measured productivity in Q3 and Q4 was also a welcome sign for policy makers, albeit the RBA’s longer-term assumption of 1% annual growth remains optimistic.
• Given that inflation remains well above target, we expect the RBA Board to continue to take a cautious approach with November the most likely timing for a first rate cut. From there we see a profile of gradual rate cuts, back to around 3% by end-2025.

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