Wednesday’s CPI release for the December 2023 quarter confirmed that the RBA’s fight against inflation is ahead of schedule, and the next move in the cash rate is likely to be a cut.
Prices rose 0.6% in the final quarter of the year, which took annual headline inflation to a two-year low of 4.1%. The RBA’s preferred measure of underlying inflation (trimmed mean), which strips out the more extreme price movements, was 4.2% over the year to December. This was a significant moderation from the 5.1% recorded in year to September.
The result confirms that inflation is cooling faster than the RBA predicted. After the latest rate hike in November, the RBA was projecting underlying inflation to fall to just 4.5% in the December quarter. In addition to the softer-than-expected inflation data, there are plenty of other signs that 425 basis points of tightening have done more than enough to slow the economy.
Chart 1: Headline and underlying CPI inflation
Source: Australian Bureau of Statistics
The latest edition of Deloitte Access Economics’ Business Outlook, released on Monday, predicts annual economic growth to have fallen below 2% in December quarter. That would be the slowest growth rate recorded in three years. And although the economy is expected to avoid a recession in 2024, growth is still forecast to fall to 1.3% – the weakest number since the early 1990s (excluding the pandemic years).
While the overall economy will still be growing, it will feel like a recession for many Australian households. Real household disposable income per capita is one way of measuring how the economy ‘feels’ to everyday Australians, as it accounts for inflation, population growth, taxes and mortgage payments. Deloitte Access Economics estimates that this measure is currently undergoing a peak-to-trough decline of almost 9% on a financial year basis. And it’s not expected to recover to the pre-pandemic trendline for at least the next five years.
Beyond the household sector, the economic outlook is mixed. Some industries appear to have turned the corner, while others are bracing for pain still to come.
Mining has largely defied soft global demand, but that outperformance looks likely to be tested. Cost of living pressures will continue to plague the retail industry until lower inflation, real wages growth, personal income tax cuts, and potential interest rate cuts start to mend household budgets in the second half of 2024.
Residential construction is failing to keep up with population growth and Australia’s housing markets continue to be strained. Yet businesses looking to expand have been hampered by an inability to attract enough skilled workers. This highlights the importance of the Federal Government’s new migration strategy released late last year, which has a range of implications across Australia’s industries.
As inflation continues to cool in 2024, the primary economic challenge for the nation is quickly becoming growth. Australia is reverting to the economy as it was prior to the pandemic. That was one characterised by sluggish growth and a lack of dynamism and competitiveness.
COVID-19 arrived on our shores and stole the attention of policymakers and the public for the past four years. But as the mindset shifts back to the long-term growth challenge, policymakers need to get serious on economic reform. Tax policy still needs to top the list, as it has done for more than two decades.
This newsletter was distributed on 2 February 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Daniel Weber, Manager at Deloitte Access Economics.
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