Leading indicators suggest the Australian economy is growing at a pace marginally below our estimate of trend, or its noninflationary growth potential. Demand has weakened in response to restrictive monetary policy, and the economy’s supply side has been constrained. We expect activity to slowly start to recover in the second half of 2024, with full-year growth around 1%. GDP grew by just 0.2% in the second quarter and by just 1% year over year, the lowest level since Australia’s last recession, in the 1990s. On a per-capita basis, the economy contracted for a sixth consecutive quarter, falling by 0.4% compared with the first quarter. Per-capita GDP decreased by 1.5% on a year-over-year basis. 

Headline inflation was just 2.7% year over year in August, down sharply from 3.5% in July and the lowest in three years. However, much of the deceleration is attributable to a 17.9% year-over-year decline in electricity prices made possible by a government rebate program. A decrease in the pace of trimmed mean inflation—a measure of core inflation that excludes items at the extremes—also slowed, but by significantly less, to 3.4% year over year from 3.8% in July. Vanguard doesn’t foresee headline or core inflation falling sustainably to the midpoint of the RBA’s 2%–3% target range until 2025, given low productivity growth and its resulting higher unit labor costs.

The Reserve Bank of Australia (RBA), noting that its current forecasts “do not see inflation returning sustainably to target before 2026,” on September 24 left its policy rate unchanged at 4.35%. The RBA acknowledged that its policy remained restrictive and economic growth has been weak. But it said that underlying inflation was “indicative of inflation momentum, and it remains too high.” Vanguard expects the RBA to remain on hold for the rest of the year before beginning a gradual easing cycle amid an anticipated weakening in both inflation and the labor market. 

The economy created 47,500 jobs on a seasonally adjusted basis in August and the unemployment rate held steady at 4.2%. The number of unemployed people fell by 10,500. The employment-to-population ratio remains near a record high, suggesting a still-tight labor market. We expect the unemployment rate to rise to around 4.6% by the end of 2024 as financial conditions tighten in an environment of elevated interest rates.