Economy running above capacity, little inflation progress in Australia

Access the research report to learn more about the key points outlined below:

• We’ve kept our GDP growth forecasts unchanged at 1.1% for 2024 and 2.0% for 2025. We’ve seen some signs the Australian economy is running a little hotter than we previously thought over the past month, which doesn’t bode well for its ongoing battle against inflation. Retail sales volumes surprised to the upside, while the labour market recorded remarkably strong growth in headcount. Headline inflation fell sharply, but the drop was overwhelmingly due to subsidies. Underlying inflation remains uncomfortably high.
  

• Lower fuel and electricity prices weighed heavily on headline inflation in Q3, which fell back to 2.9% y/y. More subsidy payments are in the pipeline, which will keep downward pressure on utilities inflation in FY2025. But these will be largely unwound in Q3 2025. Services inflation picked up in Q3, a concerning sign of the breadth of inflation pressures in the economy.

• The Reserve Bank of Australia unsurprisingly kept rates on hold at 4.35% at its November meeting. The major takeaways from the RBA’s statement were that the board still thinks the economy is running beyond its capacity and underlying inflation is still too high for rate cuts to be imminent. We still expect the first rate cut in Q2 2025, but the balance of risks around this is shifting towards a later-rather-than-sooner easing.