Australia's Economic Forecast Unveiled
Global economic growth is expected to slow due to tighter monetary policies and a soft outlook in Chinese economy.
In Australia, growth is projected below trend in 2023 and 2024 due to cost-of-living pressures and higher interest rates, but the economy shows resilience, leading to a revised near-term outlook. Labor market conditions are gradually improving, and inflation is forecasted to decline to 3½ percent by end-2024, influenced by domestic pressures, particularly in goods prices. Key uncertainties include prolonged higher inflation and weaker growth. Technical assumptions support the forecasts, with an anticipated cash rate peak, stable exchange rates, and stable oil prices. Population growth has been revised upward.
In Australia, inflation is gradually declining, slower than expected, with consumer prices expected to decrease. Stronger-than-expected underlying inflation in the September quarter led to upward revisions. The domestic economy's resilience and a gradual labor market easing contribute to revised inflation forecasts up to 2025. Services inflation is expected to moderate, and goods prices to decrease with easing global costs. Rents have surged, with high inflation expected before gradual easing due to housing supply challenges. Uncertainty remains regarding the speed and extent of disinflation in the upcoming period.
Australia's economic outlook shows increased resilience, with growth expected to remain below trend due to cost-of-living pressures and higher interest rates. Despite challenges, the near-term growth forecast is revised upwards, driven by stronger private and public investment and improved services exports, impacting demand conditions for businesses. Subdued GDP growth in the short term is linked to restrained consumption by residents, influenced by higher interest rates, cost pressures, and increased taxes affecting disposable income. Challenges persist in the housing sector, including weak demand, high construction costs, and capacity constraints affecting approvals and dwelling investment.
Non-mining business and public investments exhibit strength in the near term, driven by broad-based growth and infrastructure projects. The rebound in international student and tourist numbers is expected to support growth, offsetting weak resident spending and sustaining robust overall spending that influences businesses' capacity to manage costs. The GDP growth forecast envisions a gradual increase, primarily fueled by stronger household consumption and public demand. Household consumption is projected to approach pre-pandemic levels by late 2024, supported by recovering real income growth and increased household wealth. Positive prospects extend to dwelling investment, with anticipated growth due to eased capacity constraints, robust population growth, higher housing prices, and improved build times. However, challenges remain, particularly the lag in responding to higher-density housing demand due to extended planning and construction lead times.
Despite expectations of below-trend economic growth, there is optimism about employment growth in the near term, driven by a stronger domestic activity forecast and robust growth in the working-age population. Employment is projected to increase over the next few years, with adjustments in the labor market primarily through a decline in average hours worked. Although the labor market is less tight than in late 2022, there is still relatively low spare capacity, and measures of labor underutilization are expected to gradually rise over the next two years.
Employment growth is anticipated to be positive but lag behind the working-age population, leading to a gradual increase in the unemployment rate, reaching around 4¼ percent by late 2024 to 2025. Despite this, the economic outlook remains resilient, sustaining historically low unemployment rates. Labor force participation, especially among women and older workers, is expected to remain high, offsetting cyclical labor market slowdowns. Wages growth, nearing its peak, is forecasted to gradually decline with labor market easing, albeit slower than inflation. Recent increases in minimum and award wages have positively impacted aggregate wages growth. Although the near-term wages growth forecast has been slightly revised downward, it remains relatively unchanged due to a stronger labor market outlook. Broader measures of labor income are expected to grow faster than the Wage Price Index, implying a less significant decline in real wages. However, labor costs continue to rise, with recent weak productivity outcomes contributing to a 7 percent growth in unit labor costs. The nominal wages growth forecast aligns with the inflation target, contingent on productivity returning to pre-pandemic levels.
Source: https://www.afr.com/policy/economy/australia-s-big-build-spills-over-into-inflation-20231101-p5egnt