KPMG key forecasts
- Unemployment to edge up to 4.7% by mid 2025.
- GDP growth to remain low but edge up to 1.7% by the end of the year and 2.0% by mid-2025.
- Inflation to fall to 2.7% by mid-2025 due to government subsidies but rebound to 3.1% by end of year when the rebates drop off.
- First rate cut not till 2025, but three in first half of next year.
Dr Brendan Rynne, KPMG Chief Economist, said: “We expect Australia’s GDP growth to remain tepid on an aggregate level and moribund on a per-capita basis. Headline economic activity has only remained positive in recent quarters due to the combination of high levels of net overseas migration and government spending. That being said, KPMG believes we are either at the bottom (or close to it) of the current economic cycle and we should begin to see a slight lifting in economic activity, albeit well below historic trends.
“Our outlook is for the weakness in the private-side of the domestic economy to remain in the near term, given worsening disposable household income, and for consumer spending to stay subdued for the foreseeable future. The financial challenges facing many households appears to be worsening as the year progresses, with gross disposable income now growing at a slower pace than households’ use of that income. Interest payments on dwellings and income tax payments are now consuming more of household income than any time since 1959, the start of the ABS data series.
“The commencement of the Stage 3 tax cuts from 1 July 2024 may in theory bring this ratio down slightly, but early evidence from banks is that Australian households have saved and not spent this clawback in personal income tax payments. In our report, analysis of a wide range of indicators, such as credit and finance commitments, shows financial conditions for households are particularly restrictive, although less so for businesses.
“The ray of light in an otherwise grey economic narrative has been the strength of Australia’s labour market – although this will start to weaken – with an unemployment rate low by historic standards and relative to our developed economy peers. The flip side to this labour market strength has been falling productivity – the fundamental building block to economic prosperity.
“Higher public demand, now representing 27.6% of GDP (compared to the average of 23% achieved during the second decade of this century) has contributed to inflation remaining slightly higher – around 0.3% annually – than it otherwise would have been over the last two years. This is relatively modest, but in an environment where the RBA is fully focused on bringing inflation back to within its target band as quickly as possible, every additional counter-cyclical stimulation to aggregate demand makes that task more challenging. We are seeing headline inflation falling substantially during FY25 due largely to policy initiatives but it will rise once the rebates drop off, with core inflation remaining sticky and whose trajectory is subject to the wages growth pathway.
“KPMG expects the RBA will commence the easing cycle with an initial 25bp cash rate cut in February 2025, on the basis that the real cash rate would be too restrictive at that stage. We believe this will be followed by two further such cuts by the middle of the year and two more by the end of 2025 or early 2026. Despite higher rates overseas (now coming down) we have held the view for some time that a cash rate of 4.35% was sufficiently restrictive for Australia, given our different sensitivities to monetary policy transmission compared to other jurisdictions, and we simply needed time for the relatively tight monetary policy settings to ‘do their thing’ and bring down inflation.
“Globally, the risk of economies tipping into recession has been the driver for several central banks to start easing rates down from their relatively contractionary settings, which have sat uneasily alongside expansionary fiscal policies.
A softening global economy also faces a backdrop of several deepening conflicts, as well as broader geopolitical tensions and rising trade restrictions. By the end of the year we expect global growth to have edged down from last year.”
For further information
Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au
