Overview

• With the NSW economy in the midst of re-opening, we have made little change to our forecasts this month. A very sharp fall in activity in Q3 is locked in – we expect a fall of around 3.5% – concentrated in NSW and Vic. In the near-term, the unemployment rate may drift higher but will likely be a less reliable indicator with large fluctuations in both employment and labour force participation.
• We continue to expect a solid rebound in Q4 with the two largest states, NSW and Vic, on track to reopen early-to-mid quarter. While we don’t expect a full rebound in Q4, we see strong growth continuing into early 2022 such that the Q2 2021 level of GDP is recovered by Q2 2022. We also expect the labour market to resume its prior trajectory, with the participation rate normalising and the unemployment rate continuing its path south.
• In terms of forecasts, that sees through-the-year growth of just 0.8% this year, before a solid 4.3% rebound in 2022 and normalisation to around 2.0% in 2023. More importantly, we see unemployment declining to around 4.5% in 2022 and then nearer 4.0% in 2023 – its lowest level in over a decade.
• While we are optimistic of a relatively fast rebound in activity, we expect a more gradual build up in inflationary pressure. The soft starting point for wage growth as well as a notable period of spare capacity in the economy will need to be eroded before we see a material pickup in inflation. In addition, there will likely be a lag between the build-up of pressure on the costs side and the pass through to consumer prices.
• Therefore, we continue to see rates on hold until early 2024, when inflation should satisfy the RBA’s condition by being sustainably within the band after rising to around 2¼% in H2 2023. However, a renewed brisk pace of recovery will see the RBA continue to reduce weekly bond purchases by tapering at a more aggressive pace. We see the weekly rate tapered to $2bn per week before ending around mid-2022. That sees the current tranche total around $130bn. Around 85bn is already locked in before the next review in Feb-22.
• We expect growth (particularly in the near-term) to continue to be driven by a mix of a rebound in the private sector as well as ongoing government support – both direct payments and stimulus measures. However, there are a number of risks around when support will fade and the pace of normalisation in consumption.
• Beyond the ongoing uncertainties around the pace of full reopening domestically as well as with respect to international borders, the implementation of macro prudential policies may work to cool the housing market in the short term.

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