With the Reserve Bank continuing to stare down less-than-perfect inflation numbers against a backdrop of weak growth, the handful of weeks from late July until early September 2024 represents a fork in the road for the Australian economy and economic policymakers, according to Deloitte.
Releasing the June 2024 edition of the flagship Business Outlook, Deloitte Access Economics Partner and report lead author Stephen Smith says: “June quarter inflation data is due in late July, while June quarter economic growth will be released in early September – and these two data points bookend a critical August meeting of the Reserve Bank Board and the July labour force release.
“On the back of these events, two clear alternatives are possible, and each would set very different trajectories for our economy over the year ahead.
“Down one road, a high June quarter trimmed mean inflation result could force the hand of the RBA to lift interest rates once more in early August, further crushing household and business confidence and wiping out the benefits of tax cuts and real wage gains in the second half of 2024,” Mr Smith said.
“Down the other road, the June quarter inflation result may be more benign, consistent with the slower pace of growth in the Australian economy. That would see the RBA hold interest rates steady again next month, enabling households to lead a steady recovery in economic growth in 2024-25.
“Deloitte Access Economics’ forecasts most closely resemble the second road.”
Deloitte Access Economics Partner and report co-author Cathryn Lee says: “We believe interest rates neither will, nor should, increase from current levels – and that has been our consistent view for some time, for several reasons.
“First, interest rates at their current level are restrictive. Second, inflation is retreating back towards the target, albeit not as quicky as might have been hoped. Third, further interest rate increases are unlikely to temper price growth any more meaningfully than would otherwise be the case,” Ms Lee said.
“And finally, the surge of post-pandemic inflation hit Australia later than it hit other economies, and has therefore cooled earlier elsewhere as well. That has enabled short-term interest rates to be cut in several economies while the prospect of lower policy rates in the United States and New Zealand has also strengthened notably in recent weeks.”
Mr Smith added: “Any further increase in interest rates cannot be justified, and would just pull the rug out from under a cautious economic recovery. Should rates stay on hold, the narrative of a strengthening Australian economy through the second half of 2024 would remain intact.
“The level of real economic activity in Australia is now meaningfully below where the pre-pandemic trend would have taken it, with that outcome even worse on a per capita basis.
“In recent months, the number of people in the labour force has ticked above the pre-pandemic trend, while Australia’s stock of productive capital is also as large as it otherwise would have been if not for Covid-19. That suggests that Australia’s economy should be larger than it would have been in the absence of the pandemic. But it’s not,” he said.
“How does this conclusion square with Australia’s still-low unemployment rate of around 4%? That can be explained by a growing body of evidence that suggests Australia’s unemployment rate remains so low because of job growth in non-market sectors such as health and disability services. Those jobs are important, but strong employment growth in those sectors is not typically associated with a booming economy.”
Interest rates tackle inflation that is caused by an overheating economy. Too much demand chasing too little supply pushes up prices. By supressing demand and slowing the pace of economic growth, higher interest rates can therefore help to bring inflation to heel.
“But the Australian economy is not overheating. Indeed, the level of economic activity is below the level that might have been expected in the absence of the pandemic, even though inputs of capital and labour are higher,” Mr Smith said.
That means that the lingering inflation in the economy is predominantly being caused not by too much demand, but by other factors.
“For example, the housing shortage is pushing up rents, previously high inflation is causing ‘administrative’ price increases for items like school fees, and insurance premiums are rising because of earlier increases in the cost of claims.
“None of this sort of inflation will be tamed by higher interest rates,” he said.
Deloitte Access Economics is expecting economic growth of just 1.0% in calendar year 2024, and growth of 1.7% when measured over the 12 months to June 2025.
States and territories
“The outlook across Australia’s states and territories for 2024-25 remains varied,” Mr Smith said. “While the east coast continues to benefit from strong population growth, individuals and families are increasingly feeling the pain of cost-of-living pressures, weighing on economic growth.
“Larger mortgages in New South Wales and Victoria mean higher interest rates hit homebuyers harder in those states, though tax cuts and energy bill support for households are now providing some respite,” he said.
“Meanwhile, Queensland and Western Australia are experiencing opposing conditions in commodity markets. While Queensland’s coal exports are growing strongly, and expenditure on exploration for new coal deposits is up sharply, Western Australian commodity export volumes have been weighed down by weather-related disruptions, planned maintenance and lower volumes from the North West Shelf.
“Economic growth is set to slow in South Australia as a weak outlook for net exports offsets a recovery in household spending. Increased household spending will drive Tasmania’s growth, but less so than in other states, owing to lower population growth. The decline in LNG export volumes continues to dominate the near-term outlook for the Northern Territory, and the ACT is expected to be the fastest-growing state or territory economy in 2024-25, aided by strong growth in government spending,” Mr Smith said.
| Key forecasts: Deloitte Access Economics Business Outlook, June 2024 History
2022-23 |
Forecast
2023-24 |
2024-25 | 2025-26 | 2026-27 | 2027-28 | ||||||
| Components of real GDP, growth | |||||||||||
| Household consumption, real | 5.9% | 1.2% | 1.5% | 1.3% | 1.5% | 1.9% | |||||
| Dwelling investment, real | -3.7% | -2.6% | 0.6% | 11.1% | 11.2% | 6.9% | |||||
| Business investment, real | 8.3% | 5.7% | 1.6% | 1.5% | 2.2% | 2.4% | |||||
| Gross domestic product, real | 3.1% | 1.4% | 1.2% | 2.1% | 2.3% | 2.4% | |||||
| Gross domestic product, nominal | 9.7% | 4.1% | 1.9% | 3.5% | 4.0% | 4.5% | |||||
| Population and the labour market | |||||||||||
| Population growth | 2.2% | 2.3% | 1.5% | 1.4% | 1.4% | 1.4% | |||||
| Employment growth | 4.5% | 2.9% | 1.3% | 1.2% | 1.5% | 1.5% | |||||
| Unemployment rate * | 3.6% | 3.9% | 4.5% | 4.6% | 4.6% | 4.6% | |||||
| Prices and wages, growth | |||||||||||
| Headline CPI | 7.0% | 4.2% | 3.1% | 2.6% | 2.5% | 2.5% | |||||
| Underlying CPI | 6.3% | 4.2% | 3.1% | 2.6% | 2.5% | 2.5% | |||||
| Wage Price Index | 3.5% | 4.1% | 3.5% | 3.2% | 3.2% | 3.2% | |||||
| Financial markets | |||||||||||
| 90 day bill rate * | 3.2% | 4.3% | 4.1% | 3.1% | 2.9% | 2.8% | |||||
| 10 year bond rate * | 3.6% | 4.2% | 4.2% | 3.4% | 3.1% | 3.1% | |||||
| AUD/USD exchange rate * | 0.673 | 0.656 | 0.686 | 0.706 | 0.708 | 0.707 | |||||
Note: Data in all tables (unless otherwise indicated by *) are ‘year average percentage changes’ – the difference between the year indicated and the prior year.