Overview

• Globally, US growth looks to have slowed into Q4 but is still solid while the Euro-zone/UK and Japan economies treaded water in the second half of 2023. Major advanced economy growth is expected to be subdued this year and, with inflation declining, central banks are expected to cut rates (except for Japan). We expect growth in China to slow in 2024 as it continues to struggle due to ongoing softness in domestic demand, the property sector shakeout and weak global demand for exports.
• For Australia, our business survey and transaction data suggest that growth remained weak in Q4 and near-term indicators suggest conditions will remain soft in early 2024.
• Accordingly, we now see the current 4.35% cash rate as the peak for this cycle and expect the RBA to stay on hold until November. From there, we see the RBA easing by 125bps through 2025.
• GDP growth is expected to improve slightly in 2024 but remain below trend, before improving to over 2% in 2025. Household consumption will remain the key dynamic but housing and business investment are also likely to be subdued, weighing on growth.
• Our outlook for the labour market is unchanged with the unemployment rate expected to rise to 4.5% by end 2024. A significant degree of tightness in the labour market has faded but the unemployment rate is still low and forward-looking indicators of labour demand remain healthy.
• On inflation, we now expect 0.8% q/q (4.2% y/y) for underlying inflation in Q4. The monthly partial data points to a larger than expected decline in goods prices, while the introduction of larger rental subsidies will weigh in the quarter.
• Overall, these forecasts point to a soft landing, without a major downturn in activity or scarring in the labour market. While inflation has been high, the supply side impacts are now waning (or even correcting), particularly for goods. On the services side, some components such as rents will likely remain strong but other components will ease as demand growth slows. That will give the RBA more scope to focus on activity and the labour market as the year goes on.

For further details, please see The Forward View (January 2024)