Overview

• The economy is again rebounding strongly as NSW and Vic reopen following the extended lockdowns through mid-2021. Our internal spend data, as well as the NAB Monthly Business Survey point to a solid pickup in activity in October with more to come in November.
• Ahead of the Q3 national accounts to be released next month, we have tweaked our forecasts for activity – now expecting a fall of around 3.8% in Q3 and a larger 3.0% rebound in Q4. This sees year-ended growth of 1.6% in 2021, well above trend growth of 4.0% in 2022 and more normal growth of around 2.3% in 2023.
• Owing to a smaller than expected rise in unemployment in recent months, we have also slightly lowered our near-term peak in unemployment to around 4.7%, before the unemployment rate resumes its downward trajectory, ending 2022 at around 4.2% and 2023 at 3.8%. In the near term, the pace of the rebound in hours worked and the level of employment are likely to be more important indicators given the large shifts in labour force participation over recent months.
• In terms of inflation, we have revised up our profile in the near term, incorporating the stronger than expected Q3 result and some additional strength in prices due to ongoing supply impacts and still high goods demand. The profile is also slightly stronger in the out year with a small upgrade to our projections to wage growth.
• With a stronger inflation outlook we have brought forward our expected path for the cash rate, now expecting ‘lift-off’ in mid-2023 and an ongoing steady normalisation through to end 2024. We also expect the QE program to be wound up in February 2022, though the RBA has confirmed it will hold purchased bonds (under both YCC and QE to maturity).
• We see the risks around these forecasts as balanced. Many of the factors supporting growth prior to the recent lockdowns are expected to persist in the near term, with both dwelling and business investment expected to provide support, while household services consumption is expected to gradually recover. However, the pace of normalisation remains uncertain with the rebalancing from goods spending to services consumption likely to play out over time.
• The risks around our rate call are also balanced. Our forecasts point to inflation remaining within the target band from here, supported in the near term by temporary factors which we expect to fade as the labour market tightens. According to the RBA’s stated conditions, this points to rate hikes beginning in mid-2023. However, the level of employment consistent with a material pickup in wage growth remains uncertain, as does the pass through to consumer prices.

For further details, please see The Forward View Australia – November 2021