Overview

• Our outlook for the economy is broadly unchanged this month, though we have upped our expectation for consumption growth in Q3 based on the resilience of our high frequency data, ABS retail sales and ongoing strength in trading conditions in our business survey.
• That said, we see this as a small tweak and continue to expect consumption growth to slow as the impact of higher rates continues to flow through to households in addition to significant price pressures already at play. However, while we expect growth to track at below-trend rates in 2023 and 2024, we do not see a major downturn in the economy.
• For GDP the revision to Q3 consumption sees a print of 1.3% q/q and 0.9% for overall GDP growth. In year-ended terms this points to growth of 2.8% in 2022 (reflecting the rebound from 2021 and ongoing healthy growth), before slowing to well below 2% over each of the next two years.
• The labour market is expected to stay exceptionally tight in the near term. We expect unemployment to trough around 3.5% before drifting up to 4.3% over the next two years. With unemployment at or below a level consistent with ‘full-employment’, we see wage growth continuing to accelerate to around 3.5 y/y by end 2023.
• Inflation is expected to peak in Q4 at 7.5% y/y in headline terms, and 6.3% for the trimmed-mean measure. For Q3 we have pencilled in 1.3% in headline terms and 1.6% for underlying inflation.
• We have tweaked our monetary policy view, but still expect a peak of 3.1% – with 25bp increases in both November and December. That sees the cash rate reach its highest level since early 2013 in just a 7-month period. We expect the impact of these hikes on consumption to become more evident through Q4 and into 2023.
• Our rates view, and outlook for growth is contingent on an easing in global inflation and an expectation that wage growth only rises to a level consistent with target inflation. Should wages growth accelerate more quickly – reaching more than 4% – or inflation expectations show signs of de-anchoring, rates may need to rise further and more quickly. Consequently, this would see a sharper slowing in growth and bigger deterioration in the unemployment rate.

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