Recovery and Outlook for Australia
Global economic growth is expected to be below historical averages due to factors such as high inflation and tighter monetary policies. While Australia's trading partners, including China, are anticipated to experience slightly improved growth, domestic economic activity in Australia has slowed. This slowdown is likely to persist due to higher interest rates, increased living costs, and previous declines in household wealth. The labor market is tight but showing some signs of improvement, and inflation has eased for goods but remains strong for services and energy.
The economic outlook is uncertain, as conflicting factors affect household spending and global growth. In Australia, inflation has reached its peak, driven by lower prices for goods but continued increases in services inflation. However, the near-term outlook for inflation has been revised lower due to weaker-than-expected outcomes. Energy prices are expected to contribute significantly to inflationary pressures in the coming year. Goods price inflation is projected to moderate further, influenced by eased non-labor input cost pressures, while services inflation is expected to remain high before gradually easing over time. Unit labor costs and tight rental market conditions contribute to these projections.
The projected economic growth in Australia indicates a slowdown, with GDP growth expected to reach around 1.25% in 2023. Household consumption is anticipated to remain sluggish due to inflation and higher interest rates affecting real disposable income. However, consumption growth is expected to gradually increase in 2024 as monetary policy eases, inflation moderates, and household wealth and disposable income recover. The forecast also predicts a pickup in GDP growth in 2024, supported by a recovery in consumption and stronger public demand.
Non-mining business investment has weakened, particularly in the construction sector due to skilled labor shortages. Dwelling investment is expected to decline as construction projects clear, reflecting weak demand for new dwellings and challenges in construction costs and delays. Non-mining machinery and equipment investment is projected to remain high but faces weakened business conditions. Mining investment is forecasted to be stable, driven by sustaining projects.
Public demand in Australia is expected to remain high, with rebounding public consumption and growing public investment. Although pandemic-related spending declines will impact public consumption in 2023, it is expected to expand in the future, supported by programs such as the National Disability Insurance Scheme. Public capital expenditures will be driven by public engineering projects, although construction sector capacity constraints may affect the rollout.
Exports, especially in services like education and travel, are expected to grow as international travel gradually recovers. Resource exports will gradually increase with improved weather conditions, while rural export volumes are expected to decline as growing conditions normalize. The terms of trade are forecasted to initially increase but decline over time as commodity prices decrease.
The unemployment rate is projected to rise as economic growth slows but remain below pre-pandemic levels. Labor market conditions have improved, and the reopening of international borders will help alleviate labor shortages over time. Labor force participation is expected to remain high, driven by increased participation of females and older workers.
Labour cost growth in Australia increased significantly in 2022, reaching its highest levels in over a decade. While wages growth in the December quarter was softer than expected, it remained solid in the March quarter of 2023. The expectation is for wages growth to stabilize around 4 percent with a moderation in the year ahead. Market economists and unions anticipate wages growth to be around 3¾ to 4 percent in the coming year and then further moderate.
The Wage Price Index (WPI), which measures changes in base wage rates, is projected to reach 4 percent in the second half of 2023 before declining to 3¾ percent by mid-2025. While the near-term outlook for the WPI has been revised lower, annual minimum and award wage decisions, along with wage increases in the aged care sector, are expected to support wages growth later in 2023.
Other measures of labor cost growth, such as bonus payments and overtime rates, are anticipated to increase at a faster pace than the WPI. This suggests that the decline in real incomes may be less significant. The forecast for labor costs aligns with the goal of the Bank to return inflation to its target level, provided that productivity growth improves to pre-pandemic levels.
Source: https://www.rba.gov.au/publications/smp/2023/may/economic-outlook.html