Overview

• The release of the Q2 national accounts does not fundamentally alter our view of the economy going forward. While base effects see a small revision to 2022, we continue to see below trend growth of around 1.75% over 2023 and 2024 as the impact of the lockdown rebound ends, global growth slows and higher rates and prices begin to weigh domestically.
• That said, higher frequency data suggests that the economy has remained resilient through early Q3 with strength in the NAB Business Survey still evident while the labour market and consumer spending has held up. For now, the impact of rates has come through house prices, lending and building approvals data – reflecting the housing market’s sensitivity to interest rates.
• For the labour market, a period of slower growth will see the unemployment rate drift higher over 2023 and 2024 after troughing in the mid-to-low 3% range in late 2022. Still, the unemployment rate is expected to remain broadly consistent with full employment at around 4.3% at end 2024.
• Based on the ongoing strength in the labour market and NAB survey indicators, as well as the minimum wage case, we have revised up our outlook for wage growth – which we now see tracking by 3.2% y/y by end-2022 and 3.4% y/y by end-2023. Wage growth (alongside other domestic factors) will become an increasingly important driver of inflation as international factors wane.
• Alongside this, we have further increased our near-term inflation outlook, based on the ongoing strength in activity and cost and price measures in our business survey. We now see underlying inflation printing at 1.7% q/q in Q3 and 1.5% q/q in Q4 before easing through 2023. That sees headline and trimmed mean inflation peak in Q4 at 7.5% and 6.3%, respectively.
• Our call on the cash rate is unchanged – where we see the RBA lifting the cash rate by a further 25bps at each of the next two meetings, before pausing at 2.85% at the end of the year.
• Uncertainty remains elevated, with a series of overlapping shocks continuing to play out. The global tightening in monetary policy, war in Ukraine and ongoing COVID impacts continue to shape the global growth outlook and how these challenges are resolved is difficult to predict.
• Domestically, the RBA is seeking to follow a ‘narrow path’ to reducing inflation without a recession but faces a number of challenges. The responsiveness of wage growth to low unemployment and the extent to which inflation expectations shift in a high-inflation environment are key uncertainties for monetary policy.
• How long consumption growth can hold up under high inflation and rising interest rates is also uncertain, with savings and a strong labour market providing buffers for the time being. How long these buffers last will shape how much further interest rates need to rise.

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