Our economic outlook for Australia

Australia’s economic challenge continues to be predominantly supply‑driven. Weak productivity growth has lowered the economy’s potential growth rate. The unemployment rate, at 4.1%, remains well below the Reserve Bank of Australia (RBA) full-employment estimate, keeping upward pressure on unit labor costs. In this environment, even a moderate recovery in private demand and GDP risks stalling the disinflationary progress seen last year.

Headline inflation reached 3.8% year over year in January. We expect quarterly trimmed mean inflation, which excludes items at the extremes, to remain above the RBA’s 2%–3% target band in coming quarters, although gradual easing is likely as the effects of tighter policy continue to flow through the economy. Higher oil prices related to conflict in the Middle East represent an upside risk to our view on inflation.

Although the unemployment rate remains low and inflation appears too high, we believe the RBA will be reluctant to hike its policy rate again in March following a 25-basis-point increase in February. (A basis point is one-hundredth of a percentage point.) We continue to expect the RBA to maintain a “higher‑for‑longer” policy stance. From here, policy decisions will become increasingly data‑dependent, with further adjustments contingent on whether inflation is convincingly returning to target or instead showing renewed persistence.