Deloitte Access Economics Business Outlook: A fork in the road
Should rates stay on hold, the narrative of a strengthening Australian economy through the second half of 2024 would remain intact.
The Reserve Bank of Australia (RBA) has stared down less-than-perfect inflation numbers in recent months against a backdrop of weak growth. As a result, the handful of weeks from late July until early September 2024 represent a fork in the road for the Australian economy and economic policymakers.
June quarter inflation data is due in late July, while June quarter economic growth will be released in early September – and these two data points bookend a critical August meeting of the Reserve Bank Board and the July labour force release.
On the back of these events, two clear alternatives are possible, and each would set very different trajectories for the economy over the year ahead.
Down one road, a high June quarter trimmed mean inflation result could force the hand of the RBA to lift interest rates once more in early August, further crushing household and business confidence and wiping out the benefits of tax cuts and real wage gains in the second half of 2024.
Down the other road, the June quarter inflation result may be more benign, consistent with the slower pace of growth in the Australian economy. That would see the RBA hold interest rates steady again next month, enabling households to lead a steady recovery in economic growth in 2024-25.
Deloitte Access Economics’ forecasts most closely resemble the second road and include the view that interest rates neither will nor should increase from current levels. That has been our consistent view for some time, for several reasons.
First, interest rates at their current level are restrictive. Second, inflation is retreating back towards the target, albeit not as quicky as might have been hoped. Third, further interest rate increases are unlikely to temper price growth any more meaningfully than would otherwise be the case.
And finally, the surge of post-pandemic inflation hit Australia later than it hit other economies, and has therefore cooled earlier elsewhere as well.
Chart 1: Economic activity in Australia relative to the pre-pandemic trend
Source: Deloitte Access Economics; Australian Bureau of Statistics.
Note: This chart shows real gross domestic product (GDP) and real GDP per capita for Australia, relative to the trend in these variables calculated from March 2010 to December 2019. A ratio above 100% indicates that actual economic activity is above the trend, while a ratio below 100% indicates that the level of economic activity is below trend. The forecasts shown in the chart are drawn from this edition of Business Outlook.
As shown in Chart 1, the level of real economic activity in Australia is now meaningfully below where the pre-pandemic trend would have taken it, with that outcome even worse on a per capita basis.
Interest rates tackle inflation that is caused by an overheating economy. Too much demand chasing too little supply pushes up prices. By supressing demand and slowing the pace of economic growth, higher interest rates can therefore help to bring inflation to heel.
But the Australian economy is not overheating. Indeed the level of economic activity is below the level that might have been expected in the absence of the pandemic, even though inputs of capital and labour are higher.
That means that the lingering inflation in the economy is predominantly being caused not by too much demand, but by other factors.
Any further increase in interest rates cannot be justified, and would just pull the rug out from under a cautious economic recovery. Should rates stay on hold, the narrative of a strengthening Australian economy through the second half of 2024 would remain intact.
Deloitte Access Economics is expecting economic growth of just 1.0% in calendar year 2024, and growth of 1.7% when measured over the 12 months to June 2025.
This newsletter was distributed on 25th July 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Chelsea Boone, Senior Economist at Deloitte Access Economics
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