The Australian economy remains in an inflation-induced downturn. While inflation is now largely under control, and is now at 3.6 percent, it remains high and above the Reserve Bank of Australia’s (RBA) target range. Inflation is expected to return to the range sometime in 2025. Until then, we expect economic activity to remain subdued throughout the second half of 2024 in response to the restrictive monetary policy settings.

The RBA maintained its cash rate at 4.35 percent during its May meeting, amid signs that economic growth has slowed following a total of 425 basis points (bps) rate hike over the past two years. While we have a good idea of the effects of high interest rates on household disposable income, the effect on consumption is yet to fully play out. As inflation continues to slow, we do not expect further interest rate increases. However, the large declines in real household incomes resulting from high inflation and interest rates are expected to continue keeping consumption subdued for longer.

Tight labour market conditions continue to persist, adding to the risk of further inflationary pressure. While the increase in migration over the past 24 months has helped address some of the tightness in the labour market, we expect this trend to reverse as the federal government introduces measures to reduce overall migration to pre-pandemic levels. Concurrently, reduced consumption will exert downward pressure on labour demand. Therefore, we anticipate the unemployment rate to gradually rise from its current low level to reach the natural rate of unemployment by the end of 2024.

There are some risks to the outlook. If inflation continues to remain above target, the RBA are expected to raise interest rates further. This would drag further on household consumption, business investment and overall economic activity.