Overview

• Over the past month we have upped our expectation for the cash rate peak, increased our near-term outlook for inflation and pulled back our forecasts for economic growth in 2023 and 2024.
• The key risks in our view remain unchanged. Domestically, the wage response to an exceptionally tight labour market and the persistence of inflation more generally represents an upside risk to our rate forecast, and a downside risk to growth. Globally, the impact of widespread tightening in monetary policy poses a risk to activity and trade, as does ongoing COVID policy in China.
• To date, the economy has remained very resilient despite high inflation and a rapid increase in interest rates. However, there are some very early signs of a slowing with labour demand indicators, forward looking measures in the business survey and high frequency indicators of consumption easing. Higher mortgage rates are expected to begin flowing through more clearly in coming months.
• On GDP we now expect growth to slow to below 1.0% over the next two years. This includes some very soft quarterly growth in the back end of 2023 and is well below trend growth of around 2.25-2.5%.
• Our labour market forecasts are slightly softer, with the unemployment rate to move higher through 2023 and reach 4.5% in the second half of 2024. Wage growth should continue to increase but we expect it to peak at around 3.5%.
• On inflation, we have upped the near-term peak and lifted our expectations for 2023 with trimmed mean inflation to be tracking around 4.0% by the end of the year. Further out our inflation outlook is broadly unchanged.
• Following the RBA’s 25bp hike to 2.85% in November, we expect further 25bp increases at each of the next three meetings, taking the cash rate to 3.60% by March. With wage growth expected to remain contained, we expect the RBA can tread the “narrow path”. However, we see risks on either side.
• The federal budget is expected to have a broadly neutral impact on the economy over the next two years – and therefore not add significant pressure to already strong demand. The budget will benefit in the near term from stronger than expected economic conditions but will require structural adjustments further out.

For further details, please see The Forward View Australia (November 2022)