- Labour market may surprise again
One area that has consistently caught forecasts off guard is the astonishing strength of the labour market. It’s quite a performance and one that Myefo might also be underestimating this time around.
The released forecasts suggest an unemployment rate of 4.5% by next June, remaining the same a year later. This is juxtaposed with the RBA’s slightly more optimistic estimates of 4.4% and 4.5%. However, with a jobless rate easing to 3.9% as of November, it would require a significant slowdown in job growth for unemployment to increase by 0.6 percentage points over just seven months.
Interestingly, Myefo has adjusted employment growth expectations upwards to 1.75% for this fiscal year, a significant increase from the earlier budget prediction of 0.75%. Despite these figures, the participation rate remains high, hovering just above 67% for some time. It’s forecasted to dip slightly to 66.75% by next June, a minor revision nonetheless.
Furthermore, recent business surveys allude to a strong desire among employers to retain or hire more staff. This sentiment doesn’t quite lend credence to Myefo’s rather pessimistic wage price index, revised down from 3.25% to 3% for this fiscal year and the next.
- More rebates on the way
Ah, inflation; such a complication, isn’t it? A chorus of pundits voiced their concerns about the RBA’s prediction that consumer inflation might rise in the coming year, stopping interest rate cuts in their tracks.
Yet, the central bank’s forecast was simply assuming one-off big rebates, particularly for energy, wouldn’t occur again. Such rebates were a strategic move by state governments, most notably in Queensland and Western Australia, ahead of elections.
Nonetheless, Myefo hints at the likelihood of further Commonwealth rebates. This would assist in managing the inflation numbers, helping to maintain the CPI at a comfortable 2.75% from 3.8% last June. This projection nestles comfortably within the RBA’s target range of 2%-3%. However, the RBA has its eye on "underlying inflation," a measure beyond the regular CPI data.
Rebates indeed stoke demand and can suppress income-related assistance indexed to CPI, such as pensions. According to Myefo, electricity and rental rebates managed to reduce annual inflation in the September quarter of 2024 by half a percentage point. Always a dull affair, inflation.
- Lower growth forecasts trigger cascading revisions
A weaker-than-predicted third-quarter GDP growth appeared to be the low point in this segment of the budget cycle. Economic growth trotted at a rather uninspiring 0.8% annual pace.
This disheartening figure forced some recalibration. Myefo trimmed the expected growth by a quarter percentage point, arriving at a meagre 1.75% for the fiscal year. Before the February board meeting, the RBA will have a hard look at its growth projection, standing optimistically at 2.3% for next June. Therefore, a downward revision might not come as a surprise.
On the spending front, household consumption proved a “miss” by both the RBA and treasury. It seems folks saved more from the stage 3 tax cuts than anticipated. Consequently, Myefo halved its growth prediction in this key area from 2% in the May budget to 1%. With a similar paring back forecasted for 2025-26, household caution may continue.
- China’s central role
There’s no denying China’s pivotal role in shaping Australia’s economic fate. The country’s faltering rebound from its Covid-induced malaise, despite several stimulus attempts, has weighed heavily on Australia’s GDP. It’s a bit of a pickle, if you’re being honest.
After all, China absorbs over a third of Australian exports and significantly impacts Japan and South Korea’s economies, placing them near the top of Australia’s export destinations as well. With China’s slump concentrated on its gigantic real estate market, Myefo felt compelled to drop this year’s export growth target from 5% to a mere 1%.
The reduction shifted net exports from a predicted boost to GDP growth by 0.5 percentage points to a drag of 0.25 percentage points. This reflects the broader malaise. Myefo acknowledges that developments in China signify a potential risk to Australia’s export sector.
Adding fuel to the fire, global trade dynamics, including Trump-era potential tariffs and strategic competition between the US and China, present further challenges and uncertainties in commodity pricing.
- And those interest rates
Expectations before Myefo’s release indicated a high likelihood of an RBA rate cut of 25 basis points at its February meeting. The odds continue to favour such a cut, potentially becoming a certainty by the April meeting.
However, Myefo’s modest deficit reduction prediction, while a relief, doesn’t substantially alter expectations in an economy surpassing $2 trillion annually. The prevailing forecast frameworks face continued global and local uncertainties.
One clear message emerges—the economy may not rebound as robustly as initially anticipated. This wasn’t lost on RBA Governor Michele Bullock. Thus, if the forthcoming December inflation figures from the ABS offer some moderation, a February cut might just materialise. Otherwise, it surely can’t be too far behind, can it?
As Myefo suggests, the cash rate is expected to decline to 3.6% by mid-2026, assuming the economy doesn’t slow further than predicted. It’s a delicate balancing act, you see.
For further insights, you may explore both Myefo’s official documentation and the RBA’s economic forecasts.
