Economic growth, inflation and wages all trending down

The Reserve Bank of Australia (RBA) has upwardly revised its forecasts for economic growth and inflation, with both proving to be more resilient than expected.

The economy, which is currently growing at an annualised rate of 2.1% according to the latest data, is now expected to grow 1.5% in 2023 (compared to a July forecast of 1.0%) and 2.0% in 2024 (1.75%).

At the same time, inflation, which is currently at 5.4%, is expected to fall to 4.5% by the end of this year (previous forecast: 4.25%) and 3.5% by the end of next year (3.25%).

“Growth in the Australian economy is expected to remain below trend over 2023 and 2024 as cost-of-living pressures and higher interest rates continue to weigh on demand,” according to the RBA. 

“But the economy has proved to be more resilient in recent quarters than previously expected – which is supporting demand conditions for Australian businesses.”

Unfortunately, inflation is also staying higher for longer than predicted, with inflationary pressures dissipating more slowly than the RBA previously forecast.

“Goods prices have accounted for almost all of the decline in inflation so far; goods inflation is expected to continue falling in the near term as the resolution of supply disruptions flows through to prices paid by consumers,” according to the RBA.

“By contrast, services inflation remains high. Services inflation is expected to ease but to remain above its inflation-targeting average throughout the forecast period in an environment of elevated domestic cost pressures and still-robust levels of demand.”

Wages growth is expected to decline

The rate of economic growth and inflation will have a major impact on wages growth, which is currently running at 4% per annum.

The RBA believes wages growth is close to its peak and will decline gradually, and has slightly downgraded its forecasts from three months earlier.

Now, wages are expected to rise 4.0% this year (compared to the earlier forecast of 4.1%) and 3.7% next year (3.8%).

“Nominal wages growth is expected to remain robust in the near term, underpinned by the ongoing tightness of the labour market and high inflation outcomes,” the RBA said.

“Inertia in the wage-setting process and some lagged catch-up in real wages mean that the decline in wages growth is forecast to be slower than the decline in inflation.”