1. GDP growth is forecasted to be 1.4% per year in Q4 2023 and is expected to continue running below trend through 2024, reaching 1.6% per year in Q4 2024.
2. While a recession is not the base case, there is a possibility of a quarterly contraction in economic activity in 2024, and the per capita recession is expected to continue until H2 2024.
3. The annual rate of inflation is projected to be 4.2% in Q4 2023 and is forecasted to decline to 3.0% by the end of 2024, with underlying inflation at 2.9% per year in Q4 2024.
4. The unemployment rate is expected to increase throughout 2024, reaching 4.5% by the end of the year.
5. National home prices are predicted to rise by 5% in 2024. There are no expected further increases in the cash rate, and an easing cycle is anticipated to begin in September 2024, with rate cuts of 75bp in late 2024 and an additional 75bp of easing in H1 2025.
Monetary policy is projected to remain on hold in H2 2025. The path of the cash rate and fiscal policy will play a crucial role in shaping economic outcomes in 2024.
A Comprehensive Analysis of Australia’s Economic Outlook and Monetary Policy
Gareth Aird, a senior economist at CBA, forecasts a significant shift in Australia’s monetary policy, with interest rate cuts expected to commence in September 2024. This prediction aligns with the broader economic trends and data released in recent months, indicating a potential easing cycle in the latter part of the year.
Key Economic Indicators and Predictions
- GDP Growth Forecast: The GDP growth is projected to be 1.4% per year in Q4 2023 and continue to run below trend through 2024, reaching 1.6% per year in Q4 2024.
- Inflation and Unemployment Rates: Inflation is expected to decline to 3.0% by the end of 2024, with underlying inflation at 2.9% per year in Q4 2024. The unemployment rate is anticipated to end the year at 4.5%.
- National Home Prices: A 5% increase in national home prices is expected over 2024.
- Monetary Policy Outlook: No further increases in the cash rate are forecasted, with an easing cycle predicted to start in late 2024. This includes 75 basis points of rate cuts in late 2024 and a further 75 basis points in H1 2025, potentially bringing the cash rate down to 2.85%.
Economic Momentum and Consumer Spending
The Australian economy experienced a notable slowdown over 2023, with GDP growth below trend and a per capita recession. Consumer spending, particularly in the household sector, has been significantly impacted by rising mortgage repayments and higher interest rates. The slowdown in consumer spending is not solely due to RBA-induced factors but is also amplified by increased taxes and the effects of inflation.
Labour Market and Inflation Dynamics
Despite the economic slowdown, the labor market remained tight, and wages growth lifted to around 4.0% per year. The RBA’s objective of achieving a ‘soft landing’ – returning inflation to target while keeping the jobless rate from rising significantly – remains a possibility. However, this will require forward-looking policy decisions throughout 2024.
RBA’s Policy Stance and Market Expectations
The RBA is likely to maintain a tightening bias until at least the May Board meeting, with a shift from a tightening to an easing bias expected to occur over a short period if data supports it. The market currently ascribes a 50% chance of a 25 basis point rate cut by July, which is considered a fair assessment.
The economic data released in recent months suggests that rate cuts are more likely than not in 2024. With the RBA’s aggressive hiking cycle showing its impact, particularly in household consumption, the Australian economy is poised for a shift in monetary policy. The commencement of an easing cycle in September 2024 reflects the evolving economic landscape and the need for adaptive policy measures.