Overview

• Recent data continue to show the economy experiencing a period of weak growth – with private sector activity impacted by the soft consumer. The Q2 national accounts showed modest growth of 0.2% q/q (1.0% y/y) – led by the public sector, with household consumption falling slightly and business and dwelling investment making little contribution.
• The NAB Monthly Business survey for August suggests that momentum has seen little improvement in Q3, with business conditions below average and confidence in negative territory. That said, capacity utilisation remains elevated, consistent with the view that aggregate demand and supply in the economy are yet to fully come into balance.
• Overall, our forecasts are largely unchanged in terms of growth, the labour market and inflation.
• Feeding through the Q2 National accounts data and slightly lowering our outlook for consumption sees GDP growth of 1.0% this year, 2.2% in 2025 and 2.3% in 2026.
• Our assessment of the labour market is that it continues to cool, even though trend employment growth has remained very strong over recent months. This has been reflected in a gradual rise in the unemployment rate, which we expect to continue over the next 6 months. The unemployment rate is expected to reach 4½% by end 2024 and remain there through 2025 but importantly employment growth is expected to remain positive.
• Our inflation profile is unchanged. We see trimmed-mean inflation falling to 3.5% by end 2024 and back into the top of half of the RBA’s target band by end 2025.
• On rates, our view is also unchanged, where we expect the RBA to remain on hold at next week’s meeting and until May 2025. However, the recent data flow skews the risk around our call to February. We still expect the RBA to cut rates by around 125pbs over a year or so once the cutting phase begins, taking the cash rate back to around neutral at 3.1%
• Overall, our forecasts still imply a soft landing for the economy and a gradual easing of the cash rate back towards neutral. This contrasts with some other advanced economies, including NZ, where growth has slowed more, and the labour market has loosened more significantly.

For further details, please see The Forward View Australia – September 2024