August 19, 2024
Our outlook for year-end 2024
1%
Economic growth,
year over year
Leading indicators suggest the Australian economy is growing at a pace marginally below our estimate of trend, or its non-inflationary growth potential. Demand has weakened in response to restrictive Reserve Bank of Australia (RBA) monetary policy, but the economy’s supply side has also been constrained, with lackluster productivity growth keeping inflationary pressures elevated.
3%
Headline inflation,
year over year
The pace of year-over-year headline inflation rose in the second quarter for the first time since the quarter ended December 2022, to 3.8%. The pace of trimmed mean inflation—a measure of core inflation that excludes items at the extremes—slowed modestly, to 3.9% on an annual basis. Given low productivity growth and, as a result, higher unit labor costs, we don’t foresee headline or core inflation falling to the midpoint of the RBA’s 2%–3% target range until 2025.
4.35%
Monetary policy rate
Emphasizing that it will be “some time yet before inflation is sustainably in the target range,” the RBA on August 6 left its policy rate unchanged at 4.35%. Returning inflation to target is its highest priority, the RBA said in its monetary policy statement. 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.
4.6%
Unemployment rate
An elevated employment-to-population ratio suggests a still-tight labor market. We expect the unemployment rate to rise from its current 4.2% to around 4.6% this year as financial conditions tighten amid elevated interest rates.
What I’m watching
Elevated unit labor costs
Labor productivity has sagged since mid-2022 and wages have risen, pushing unit labor costs well above what would be consistent with the RBA’s 2%–3% inflation target. We believe the Australian economy is operating around full capacity. Given diminished productivity, a sustained period of weak demand will be needed to bring inflation down to target.
Grant Feng,
Vanguard Senior Economist
Notes: Data reflect year-over-year percentage changes of four-quarter moving averages.
Source: Vanguard estimates using data from CEIC as of June 8, 2024.
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