Short-term Economic Outlook
The main forecasts are pretty much as expected and close to those released by the RBA in its May Monetary Policy Statement. Economic growth is expected to slow this financial year before picking up the following financial year as households’ real disposable income (disposable income after allowing for inflation) growth improves. The weaker economy will see a modest rise in the unemployment rate that will hit 4.25% by mid-next year and peak around the end of next year.
Inflation will slow from its current rate of 7% to a bit over 3% by mid-next year. Wages growth is expected to rise only modestly further. Business investment is forecast to slow but remain positive (higher inflation means more capex spending gets less).
A big decline is expected in the terms of trade (i.e., commodity prices are expected to decline substantially) next financial year by over 13% and over 8% the following year. This is not quite as sudden a decline as assumed in October (a factor that has helped the budget forecast). Treasury changed its methodology from assuming a quick move back to the assumed long-run value of the terms of trade to using financial market pricing. The updated approach is agreeable.
There is also agreement that the economy will slow this year, although there is a weaker outlook in 2025 compared to the current Treasury forecast. One reason for the difference is the expectation of economic growth being at its weakest in the first half of next year, while Treasury likely assumes the low point is in the second half of calendar 2023. Consumer income growth is likely to exceed inflation by early 2024, boosting household spending power. However, after depleting their savings this year, it is more likely that households will focus on rebuilding their saving buffer. Furthermore, households are likely to remain cautious if interest rates remain where they are or increase. Rate cuts are not anticipated until the second half of next year.