Overview

• A number of data releases in April and May have provided valuable information about how the economy is tracking, confirming that demand growth remains subdued and the labour market is easing in line with our forecasts, but inflation nonetheless remains elevated at 4.0% y/y.
• The upcoming Q1 National Accounts release will provide a more detailed picture of how household incomes, consumption and savings have evolved, while the resilience of business investment in the face of slowing activity will also be of interest. We expect another very small positive for quarterly GDP growth but volatility in the trade and inventories components leave some risk of a negative.
• More broadly, we continue to expect below-trend GDP growth in 2024, with the unemployment rate gradually rising to around 4.5% as the population outpaces employment growth. Household income should strengthen later in the year on the back of rising real wages and tax cuts, bringing growth back to around trend in 2025.
• Treasury’s forecasts in the recent Federal Budget paint a similar picture. While the government’s energy subsidies will impact headline CPI measures over the next couple of years, what matters for the economy is the overall fiscal impulse (across federal and state levels). We assess this impulse to be moderately expansionary, but not enough to derail our expectation that subdued consumption growth will bring underlying inflation back into the RBA’s target band in 2025.
• The outlook for wage growth remains a key factor shaping inflation and monetary policy, with the Q1 WPI print of 4.1% y/y supporting the view that wage pressures have passed their peak. The current rate of wage growth is still uncomfortably high for the RBA but we expect some easing over time as the labour market softens.
• On balance, we maintain our view that the RBA will keep rates on hold until a first cut in November – though there is now a risk this slips to early-2025.
• Demand pressures and supply constraints continue to shape prices for dwellings and rents. The Federal Budget had a focus on addressing supply issues, while migration is forecast to slow to more normal rates in 2024-25. Nonetheless, we expect a tight housing market will persist for some time yet.

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