May 16, 2023

The Forward View – Australia: May 2023

Rates to pass 4% with economy to slow in response


  • Our outlook for the economy is broadly unchanged over the past month – though we have reverted to our previous expected rate call of a peak of around 4.1%. Overall, the pattern of our forecasts is similar to the updated forecasts recently released by both the RBA and Treasury, albeit we are marginally more pessimistic in the near term.
  • For both 2023 and 2024 we expect growth to be well below trend at 0.7% and 1.2%. That represents the slowest annual growth since the early 1990s, outside of the covid impacted period in 2020. Consumption dynamics remain the key force at play, with pressures on households to weigh through H2 2023 and early 2024.
  • Our expectations for the labour market are largely unchanged – with weaker employment growth unable to fully absorb population growth – and unemployment is expected to rise to 4.7% by end 2024. That is a relatively large increase but comes off an exceptionally low starting point.
  • We see inflation moderating broadly in line with the RBA’s profile – reaching 4% by end 2023 and 3% by end 2024. Large uncertainty remains around the adjustment in goods prices – how quickly and far they fall – while globally services inflation has proved to be sticky. For Australia, wage growth will be important but for now remains consistent with inflation returning to the RBAs target band.
  • We have reverted to our earlier expectation that rates will peak at 4.1% and see a material risk that the RBA peaks at 4.35% in the near term. We continue to expect cuts back towards neutral in 2024 as the economy slows and unemployment rises.
  • Following the release of the May SoMP and the 2022/23 Budget we have compared our forecasts to those of the “official family”. Generally, there is an expectation that GDP growth will slow to below trend over the next two years, though both the RBA and Treasury are marginally more optimistic in the near term. Consequently, we see a larger increase in the unemployment rate and a slightly faster moderation in inflation.

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