Statement on Monetary Policy – November 20243. Outlook

3.1 The global outlook

Growth in Australia’s major trading partners has been revised up slightly following the announcement of stimulus measures by Chinese authorities.

Overall GDP growth for Australia’s major trading partners is expected to be moderate, at close to 3½ per cent in 2025 and 2026 (Graph 3.1). The outlook has been revised slightly higher relative to three months ago, as upward revisions to growth in China have been only partially offset by downward revisions to growth in New Zealand and India (for 2026).

GDP growth in China has been revised higher, mainly reflecting recently announced economic policy support. While full details on the size and composition of further fiscal support are yet to be announced, our China forecasts assume that around CNY2 trillion (or 1.6 per cent of GDP) of additional central and local government fiscal support could be provided, alongside measures announced by the central bank and Chinese regulators. We expect this support will boost consumption and manufacturing investment and offset a weakening outlook for infrastructure investment. Policy support is expected to materially impact growth from 2025. Risks to the outlook for growth in China have become more balanced since the announcement of the stimulus. However, structural headwinds to the economy, such as ongoing weakness in real estate and local government financial conditions, could still intensify.

Growth in most G7 economies is expected to pick up a little in 2025, except for the United States. GDP growth in G7 economies overall is expected to be supported by stronger real income growth and easing financial conditions but is forecast to remain below pre-pandemic decade averages. Following a period of strong growth, US GDP growth is forecast to slow a little further in coming quarters, before picking up as financial conditions continue to ease; Consensus forecasts for US growth in 2025 are a little weaker than the latest Federal Reserve forecasts.

Many advanced economy central banks are easing policy settings as they have become increasingly confident that inflation is returning sustainably to targets and with some noting emerging downside risks. While central banks generally expect only modest increases in unemployment rates from current levels, many have become more attentive to downside risks to the labour market and inflation; labour market conditions remain tighter in Australia than in other advanced economies. Inflation in New Zealand, Canada and Sweden is now assessed to be around target and is expected to remain there in the forecast period (for Sweden, this abstracts from a temporary drag from energy prices). Inflation is expected to approach the target next year in the euro area, in 2026 in the United States and United Kingdom, and in 2027 in Norway.

3.2 Key domestic judgements

The central forecasts incorporate many judgements, such as the choice of models used and whether to deviate from the models given the signal from recent data or qualitative information from liaison. These judgements are considered and debated extensively throughout the forecast process. The three most important judgements for the staff’s current assessment of the economic outlook are discussed below.

Key judgement #1 – Household consumption growth will recover in line with growth in real incomes, but a bit later than forecast in the August Statement.

The weak consumption outcome in the June quarter and partial data for the September quarter suggest that momentum in consumption growth has been weaker than expected in the August Statement. The staff judge that this reflects a combination of underlying weakness and the unwinding of one-off spending in the March quarter (see Chapter 2: Economic Conditions). The underlying weakness may reflect a greater degree of precautionary saving by households than had been assumed, or that it may take more time than expected for household spending to pick up following the earlier stabilisation of real incomes and recent tax cuts. Weighing these considerations up, the staff have taken some signal from recent outcomes, with the level of consumption per capita in the near term revised down from three months ago and the saving rate revised up. Further out, we continue to judge that the pick-up in real income and wealth will boost consumption growth, such that by 2026, consumption per capita and the saving rate return towards the levels expected at the August Statement.

Key judgement #2 – The labour market will continue to ease at a gradual pace and then stabilise following the pick-up in GDP growth.

The unemployment rate is forecast to gradually increase over the coming year, consistent with subdued growth in economic activity and the signal from some leading indicators of labour demand, including vacancies and hiring intentions.

We judge that part of the adjustment to easing labour demand will continue to occur through lower vacancies (which are still elevated) and average hours worked. While the rate of layoffs has increased, it remains at a low level relative to history. It is judged that this will likely remain the case while vacancies remain high, and so the easing in labour demand can be partly absorbed by a decline in vacancies without a large increase in the unemployment rate. While unemployment could rise sharply if businesses have been hoarding labour and reach a tipping point, there is little evidence that this has been occurring on a large scale: survey measures of capacity utilisation remain above average and vacancies and average hours are at or above their long-run trends.

In recent months, some labour market indicators, such as the underemployment rate, suggest that the labour market could have stopped easing. If labour underutilisation does not increase by as much as anticipated, this could slow disinflation progress given the assessment that there is currently excess demand in the labour market. However, staff have judged that there is enough evidence across the full suite of indicators for further gradual easing in labour market conditions.

Key judgement #3 – The unemployment and output gaps will gradually close, bringing inflation back to target.

Estimates of how far the economy is from sustainable full employment or potential output are important considerations for the wages and inflation outlook, but are subject to considerable uncertainty. Moreover, as economic conditions have eased and the economy and labour market have moved towards a better balance, it becomes more difficult to conclude if the economy is operating at above or below capacity.

The current assessment is that there is excess demand in the labour market. However, the gradual increase in the unemployment rate over the forecast period is judged to see the labour market return to around the level consistent with full employment in late 2025. In the broader economy, a period of subdued economic growth has quickly reduced excess demand; however, it is assessed that parts of the economy remain tight. Further weakness in aggregate demand is expected to bring the economy closer to balance. These outcomes are based on an assumption that trend labour productivity growth picks up. Risks around this judgement are discussed in section 3.4 Key risks to the outlook.

3.3 The domestic outlook

Growth in domestic demand is expected to pick up as growth in household consumption recovers and public demand continues to support activity.

The forecasts are conditioned on a cash rate path derived from financial market pricing; it is assumed that the cash rate has peaked, with market pricing implying little chance of a further increase. The cash rate is assumed to begin to decline around mid-2025, and to decline to around 3.5 per cent by the end of 2026. This is a little higher than the assumption underpinning the forecasts in August. The pick-up in private demand is driven by an increase in household consumption growth, which is expected to reach its pre-pandemic decade average in late 2025 (excluding the effect of cost-of-living subsidies, see below), driven by growth in real incomes as the Stage 3 tax cuts take effect and inflation eases.

The pick-up in private demand is expected to occur a little later than in the August Statement, driven by a slower recovery in household consumption. This slower recovery reflects a reassessment of household consumption and savings momentum following the unexpectedly weak consumption outcome in the June quarter and partial data for the September quarter. These data suggest that households will save slightly more of their income in the second half of 2024 than was previously assumed (Graph 3.2). A lower assumption for resident population growth is expected to weigh a little on aggregate household consumption growth in 2026.

Cost-of-living subsidies will lower measured household consumption growth in the September quarter of this year before boosting it in 2025. The official statistical treatment of the cost-of-living subsidies provided to households will have the effect of reallocating measured spending between household and public consumption. This is expected to reduce measured household consumption growth in the September quarter of 2024 by around 0.4 percentage points, before adding to household consumption growth in 2025 as the subsidies unwind (as currently legislated). The impact of this reallocation was factored into the August Statement forecasts.

The outlook for private investment is broadly similar to the August Statement. Business investment is expected to stabilise around current levels over the year ahead. Information from the RBA’s liaison program and the ABS Capital Expenditure Survey suggests that firms have moderated their investment intentions for the year ahead in response to persistent construction cost pressures and delays to renewable energy projects. By contrast, the level of dwelling investment is expected to be higher than previously expected in the near term, consistent with the pick-up in building approvals over the past year. The effect of construction cost pressures on business investment has been slower to materialise than for dwelling investment, consistent with the shorter lead times for detached housing projects and the sustained period of headwinds to household incomes. Private investment is expected to pick up from late 2025, supported by the assumed decline in the cash rate, the large pipeline of infrastructure work, digitisation and the renewable energy transition.

Public spending is expected to continue supporting aggregate economic growth. Growth in public consumption is expected to remain robust over coming years, supported by the provision of government services to households, with the outlook similar to three months ago (Graph 3.3). The near-term outlook for growth in public investment is weaker, with investment expected to stabilise following the completion of some major projects; information from liaison suggests that some projects have been deferred. However, this weakness is expected to be temporary given investment spending announced in government budgets and the large pipeline of engineering work yet to be done.

The outlook for growth in net overseas migration has been revised down, which will reduce growth in both demand and supply in the economy from mid-2025.

In addition to the near-term downward revisions to GDP growth stemming from weaker private demand, GDP growth has been revised down from mid-2025 in line with slower expected growth in net overseas migration (Graph 3.4). The lower forecast for net overseas migration primarily reflects the impact of a range of international education policies, which includes a tightening in student visa policy; the effects of which has started to become apparent in timely data (see Chapter 2: Economic Conditions). This has driven a downwards revision to the outlook for international education exports from mid-2025. The outlook for other migration has also been revised down and this is expected to weigh a little on household consumption. Lower population growth also reduces the supply capacity of the economy given the propensity of migrants to work; this suggests that there will not be a material impact on the amount of spare capacity in the economy over the medium term.

Demand and supply are expected to move closer to balance over the forecast period.

It is assessed that there is still excess demand in parts of the economy, but the economy will gradually approach balance. The output gap is expected to narrow further, particularly in the near term alongside subdued growth in aggregate demand, and close by the end of the forecast period, although there is considerable uncertainty around this projection. The staff’s assumption for potential output growth reflects a decline in population growth from its current high rate being largely offset by an increase in trend productivity towards its pre-pandemic decade average. There are large risks around the outlook for supply capacity, which are explored in section 3.4 Key risks to the outlook.

The labour market is expected to continue to ease over the next year before stabilising at a level consistent with full employment estimates. This outlook is little changed from the August Statement.

Labour underutilisation rates are expected to increase gradually alongside subdued growth in economic activity. The unemployment rate is forecast to increase further over coming quarters, consistent with the recent easing in some leading indicators of labour demand, including job vacancies and employment intentions (Graph 3.5). Supported by the gradual pick-up in GDP growth, the unemployment rate is expected to stabilise at around 4½ per cent, which is consistent with the staff’s estimates of full employment.

Growth in employment and the labour force are both expected to ease in the medium term. Participation in the labour force, which has been higher than expected in recent months, is now judged to pick up a little more in the near term, reflecting solid employment opportunities as well as cost-of-living pressures faced by households. Further out, the participation rate is expected to continue to increase very gradually, as the continued trend of increased participation by females and older workers is partially offset by some discouraged workers leaving the labour force as demand conditions eases.

Growth in nominal wages is expected to moderate further as the labour market eases.

Wages growth has passed its peak and is expected to slow further as the labour market eases. The quarterly pace of wages growth eased a little more than expected in the June quarter, and points to slightly lower wages growth over the second half of 2024 than previously expected (Graph 3.6). The 3.75 per cent increase to modern award wages, effective from 1 July, is a step down in award-linked wages growth compared with the previous year. Further easing in the labour market is also expected to continue to put downward pressure on wages growth, consistent with information from liaison that employers expect a further slowing in wages growth in the coming year. The pace of nominal wages growth is expected to remain high relative to productivity growth outcomes in the near term, before gradually easing towards the end of the forecast period to a pace that is consistent with inflation remaining sustainably within the target range. However, the sustainable level of wages growth in the medium term depends on underlying trend productivity growth, as discussed in section 3.4 Key risks to the outlook.

Growth in unit labour costs is expected to moderate from its high rate over the coming years. Growth in nominal unit labour costs (ULCs) – the measure of labour costs most relevant for firms’ cost of production and so for inflation outcomes – is expected to ease as nominal wages growth gradually eases (Graph 3.7). Weak productivity outcomes are also expected to contribute to ULCs growth remaining elevated. Growth in ULCs is expected to remain a little above the rate consistent with achieving the inflation target until the latter half of 2026.

Labour productivity growth in the second half of 2024 is assumed to be weaker than previously anticipated; there is significant uncertainty around the longer term outlook. The weaker near-term outlook reflects the lower forecast for GDP growth but continued solid employment growth. The strength in healthcare employment has had a small drag on measured aggregate productivity growth in recent years, and this effect is likely to continue. The productivity outlook further out is little changed. Productivity growth is assumed to pick up in the medium term to reach its long-term (excluding the pandemic) average rate (see section 3.2 Key domestic judgements). The forecasts assume multifactor productivity growth will rebound over the next couple of years, which would be consistent with increased rates of technology adoption, improved reallocation of labour between low- and high-productivity firms, improved labour quality and improved quality of job matching. However, there are risks to the outlook for productivity that will have implications for inflation outcomes (see section 3.4 Key risks to the outlook).

Underlying inflation has continued to moderate and is expected to ease further. The outlook for underlying inflation is little changed from the August Statement.

Underlying inflation – as measured by trimmed mean inflation – is expected to return to the target range in mid-to-late 2025 and to the midpoint of the target in late 2026 (Graph 3.8). The output and unemployment gaps are projected to narrow and close over the forecast period, and growth in unit labour costs is expected to ease, which would help bring the economy back towards a balanced position and inflation back to target. Inflation expectations are assumed to remain consistent with achieving the inflation target over this timeframe.

Year-ended headline inflation is expected to temporarily be within the target range, before rising again in the second half of next year. Governments’ cost-of-living measures – electricity rebates and increases to rent assistance – reduced headline inflation in the September quarter and will also weigh on inflation in the December quarter (Graph 3.9). However, year-ended headline inflation is expected to increase when the electricity rebates are scheduled to unwind next year, which would see headline inflation increase sharply to be back above the target range in the second half of 2025, before converging towards underlying inflation once these temporary factors have passed. Because headline inflation can be affected by large swings in the prices of individual items, the RBA continues to pay close attention to underlying measures of inflation.^[1]

Services inflation remains high and is expected to decline only gradually over the coming year. Strong domestic cost pressures (both labour and non-labour inputs) have kept services inflation outcomes high in recent quarters. The more gradual decline in services inflation relative to the earlier decline in goods inflation is in line with trends in other advanced economies. However, cost pressures are expected to ease alongside a softening in labour market conditions, contributing to a gradual easing in market services inflation over the forecast period. Inflation of administered items (excluding utilities) is expected to ease a little in the coming year since the prices of some items are indexed to past headline inflation, which has declined.

Housing inflation is expected to moderate from a high level over the forecast period, and to ease a little more quickly than expected in the August Statement. Tightness in the rental market is now forecast to unwind a bit more quickly than expected in August, due to increases in average household size (possibly linked to affordability constraints) and slowing population growth. Despite the recent sharp slowing in advertised rent inflation, CPI rents inflation is expected to remain elevated for a time as rents on new leases gradually flow through to the stock of rents in the CPI. New dwelling cost inflation is expected to moderate as capacity constraints, such as shortages for skilled trades, gradually abate. However, in some capital cities, particularly Perth, these capacity constraints are expected to take longer to ease.

Goods inflation has eased and is expected to stabilise at a relatively modest pace during the forecast period. The earlier easing in imported inflation as global supply chains normalised last year has flowed through to domestic goods prices. Growth in domestic labour and non-labour costs is moderating, and information from liaison suggests that softer demand conditions have meant that retailers are less able to pass on increases in costs. While there has been little evidence from liaison that elevated shipping costs are flowing through to retail prices, there have been some reports of retailers’ margins being affected by recent shipping cost rises over the past few months.

3.4 Key risks to the outlook

The risks to the domestic outlook for activity and inflation are broadly balanced.

While we view the risks to the outlook overall as balanced, there is always considerable uncertainty about key judgements and broader conditions. Staff have considered a range of plausible ways in which the economy could evolve differently to our base case or central forecast, and the likely effects this could have on our inflation and employment objectives.

Key risk #1 – The period of subdued growth in private activity could be more persistent, or the recovery in private activity could be much stronger.

The central forecast is for a gradual recovery in private demand following a period of subdued growth.

However, the recent weak consumption data suggests it is possible that consumers are even more cautious and constrained than the central forecasts assume, and they may choose to save more of their growth in income. There is also a risk that large investment projects may be delayed even further than we have assumed if persistent construction cost pressures and weak consumer demand mean that construction projects do not become more economically feasible. This could prolong the period of below-trend GDP growth. The staff considered a scenario of weaker consumption and investment growth using the MARTIN model. GDP growth would be approximately 0.5 and 0.1 percentage points lower over 2025 and 2026, and the increase in the unemployment rate would be more pronounced. This would see a period of excess supply or spare capacity in the economy, which would imply inflation could reach the midpoint of the target by mid-2026 (without any change to the cash rate path that underpins the central forecast).

Alternatively, growth in private aggregate demand could rebound more quickly than forecast. Households may respond more strongly than expected to the near-term pick-up in household incomes if a greater share of households have become liquidity constrained in recent years than thought, or because households are willing to save less out of their current income following the significant increases in wealth (including a large stock of savings) since the onset of the pandemic. Business investment may pick up more quickly than expected, in part due to improved business sentiment spurred by improving consumer demand. In the ‘higher private activity’ scenario, the unemployment rate would remain below estimates of full employment over the forecast period. As such, progress in reducing inflation would be slower, with the scenario showing trimmed mean inflation in the top half of the target range at the end of 2026 (Graph 3.10).

Key risk #2 – Weak productivity growth could slow progress on disinflation.

It is possible that we are overestimating the degree of supply capacity in the economy over the next few years because productivity growth may not return to its long-run average growth rate as currently assumed. The staff’s assumption for potential output growth assumes that a decline in population growth from its current high rate will be largely offset by an increase in trend productivity. However, productivity growth has been weaker than expected in recent years (see Box D: Annual Review of the Forecasts). Staff considered two scenarios of weaker multifactor productivity growth: ‘moderate’ multifactor productivity growth assumes the average growth over the five years before the pandemic, while ‘zero’ multifactor productivity growth is a continuation of recent outcomes (Graph 3.11).

Lower productivity growth would be inflationary because it is expected to cause a greater reduction in the supply capacity of the economy than in GDP growth. This is because it would take households, businesses and governments some time to adjust their saving, spending and investment decisions to the weaker productivity outlook. In both downside scenarios, GDP growth is moderately weaker by the end of the forecast period (Graph 3.11). Under the zero productivity assumption, the progress of disinflation would be expected to slow sharply, and inflation would be at the upper bound of the band by end 2026.

Key risk #3 – Global uncertainty creates two-sided risks to the domestic outlook.

The global outlook remains highly uncertain given heightened geopolitical risks and potentially large changes to the global trade and fiscal policy outlook during the forecast period. If such shocks materialise, they could have significant effects on the outlook for activity and inflation in Australia.

An intensification of regional conflicts could disrupt trade and lead to sustained increases in shipping costs or commodity prices, while also lowering global growth. This would result in higher inflationary pressure domestically by further constraining the supply capacity of the economy (e.g. given the supply chain issues that are already affecting construction activity).

There is also uncertainty around the degree of fiscal stimulus in the global economy over the next couple of years. If the Chinese fiscal stimulus is considerably larger than currently assumed in our central forecast, this will boost domestic growth (and inflation) through trade and commodity linkages (see Box B: Economic Policy Developments in China). In such a scenario, domestic activity would be boosted by higher exports and export prices, although there would be little upside to the volume of resource exports unless mining capacity was expanded. Ultimately, the size of the boost to the domestic economy from a large Chinese stimulus package would depend on both the response of the exchange rate (which would typically appreciate) as well as how governments respond to any unexpected commodity price revenue.

3.5 Detailed forecast information

Table 3.1 provides additional detail on forecasts of key macroeconomic variables. The forecast table from current and previous Statements can be viewed, and data from these tables downloaded, via the Statement on Monetary Policy – Forecast Archive.

Download a PDF version of this table

Endnotes

See RBA (2024), ‘Box C: Headline and Underlying Inflation’, Statement on Monetary Policy, August. [1]