Australia’s economy might not feel miraculous to households and businesses on the brink, but there is definitely an element of mystery about how it’s actually travelling.
Contrary to more hawkish forecasters, the Reserve Bank on Tuesday did not adjust its settings to imply its next move would be an interest rate rise.
Sure, the bank’s first rate cut since November 2020 may still be a way off, perhaps some time into 2025. But the RBA remains prepared to hold its course even if it hits bumps on the road to a lower inflation rate.
The higher-than-expected March quarter inflation isn’t yet a big worry for governor Michele Bullock.
Nor was the lifting of where the RBA thinks inflation will land in June compared with its forecasts made in February. Three months ago, it had pencilled in the annual consumer price index to be 3.1%. Now it’s expecting 3.8%.
In fact, the updated inflation forecast doesn’t “look a hell of a lot different than the November forecast”, Bullock told media after the RBA held its cash rate at 4.35% for a fourth board meeting in a row.
The updated forecasts – contained in May’s quarterly statement of monetary policy – contain a few puzzles. The answers will take time to be revealed.
In the broadest terms, the RBA doesn’t expect the inflation uptick to last because the economy will slow even further. Annual GDP growth in 2023 was 1.5% – well shy of population growth of about 2.4% – and it will sag to 1.2% by mid-year before a modest rebound to 1.6% by December.
Households will continue to wear most of the burden in the short term. Annual consumption growth will remain at December’s squintingly small 0.1% pace until June this year. It should quicken to 1.3% by December and double that by next June.
In February, the RBA thought consumption had expanded 0.4% in 2023 and would accelerate to 0.8% growth by next month. Wage increases would be more clearly ahead of inflation than it now predicts.
The whiff of the miraculous, though, is stronger when it comes to jobs.
“What’s going on in the labour market is a very interesting question,” Bullock said.
Shoring up labour demand were increases in health and education positions and employers still on the hunt for the right mix of staff. After Covid-19, some companies were preferring to hoard their crew, Bullock said.
Despite all the angst internationally and a slowing domestic economy, the RBA’s jobless forecast was actually trimmed.
March’s 3.8% unemployment rate should nudge higher to 4% by June and 4.2% by December, marginally more optimistic than three months ago. Historically, many treasurers would cheer that outcome.
Extra spending by governments hasn’t been fanning the inflation problem, in Bullock’s view, despite recent commentators’ calls for a contractionary federal budget next week.
Treasurer Jim Chalmers has rejected the need for what he called “scorched-earth austerity” and the still relatively new RBA chief wasn’t calling for it either.
Business was the other main economic surprise. Smaller businesses were bearing a similar brunt of rate increases as households but the sector was holding up better than Bullock expected. (The RBA also lifted its near-term forecast for business investment before it starts to taper off in the second half of the year.)
Bullock wasn’t asked about how Australia stacked up internationally, but by many measures the country is faring well. Our inflation rate may remain above peers such as the US, UK and New Zealand, but interest rates are below theirs and might not go higher.
The federal government, too, is likely to announce a second straight budget surplus next week, at $10bn-$15bn, or a bit above 0.5% of GDP. In those three nations, budget deficits range from 5.8% to 7.6% of GDP.
Sure, future budgets may need a few miracles, but things could be worse.