• The economy continues to track broadly as expected and though downside risks have emerged, we still see the economy on track for a soft landing.
• We have lowered our expectation for GDP growth this year to 1.8% yoy but left our inflation and labour market tracks unchanged.
• The RBA will need to continue to lower rates in the near term to ensure that the labour market remains healthy.

There has been a steady stream of domestic and global data in May. Our expectations of the risks around the global backdrop have eased somewhat over the past month with a de-escalation of tensions between the US and China. For Australia, the impact on confidence has been fairly muted to date.

Domestically, the recent run of data suggests that inflation has continued to gradually moderate and that the labour market has remained resilient. However, activity indicators point to the risk that growth may not be rebounding as quickly as expected. Consumption partials for Q1 suggest that the consumer lost momentum after a pickup in growth in Q4. The read across our business surveys also suggests that the outlook for investment growth remains soft, and while the labour market components have been relatively better, there is a risk that softer profitability and trading conditions flows through to the labour market.

The RBA lowered the cash rate by 25bp this week and published revised forecasts. Both the statement and the press conference have developed in a more dovish direction and acknowledged that the balance of risks have shifted to the downside. Their forecasts for the economy continue to converge towards our own, and we continue to see the need for the RBA to return the cash rate to a neutral stance over coming months but have lifted our terminal rate expectation to 3.1% (from 2.6%) in recognition of a more modest offshore headwind.

We continue to expect below trend growth this year (but ongoing recovery next year); the unemployment rate to drift higher, peaking at around 4.4% in late 2025; and underlying inflation to settle around the middle of the target band from mid-2025.

While global trade tensions have eased to a degree over recent weeks the risk of a re-escalation remains and high levels of global uncertainty will likely persist for some time. For now, confidence measures have not deteriorated significantly, while financial markets and commodity prices have rebounded, we see these “amplifications” as the biggest risk to our forecasts for this year.

For further details, please see Forward view Australia (23 May 2025)