Our economic outlook for Australia

Robust household spending suggests that Australia’s current monetary policy setting may be less restrictive than the Reserve Bank of Australia (RBA) believes. Spending rose by a stronger-than-expected 0.8% in June, led by discretionary goods, lifting annual growth to a robust 6%. The softening housing market has yet to generate a meaningful negative wealth effect. Instead, households have drawn on solid income growth and accumulated savings to support consumption. This resilience is consistent with the recent strength in labor market and credit indicators and continues to support employment in labor-intensive service sectors.

Australia’s supply side remains weak, however, largely reflecting a persistent productivity challenge. GDP per hour worked fell by 0.6% quarter over quarter and was only 0.3% higher year over year. Annual productivity growth of 0.3% is broadly in line with the average pace of the past decade, but remains very low by historical standards. For the inflation outlook, what matters most is the balance between aggregate demand and aggregate supply. With sluggish productivity growth and limited supply-side momentum, a stronger pullback in demand will be needed to put the economy on a gradual disinflation path.

Meanwhile, second-quarter trimmed mean inflation inched up to 3.6% year over year, well above the RBA’s target, and may rise further in the coming months as higher energy prices pass through more broadly. These persistent inflation pressures warrant the hawkish stance in the RBA’s communication. Even while keeping rates on hold, the central bank is likely to maintain a tightening bias until there is clearer evidence that demand is slowing sufficiently to return inflation sustainably to target.

Therefore, despite an August 11 pause, the broader policy stance remains hawkish. The RBA has tightened financial conditions materially over a relatively short period, and the full effects have yet to flow through to economic activity and inflation. We continue to expect the RBA to leave the cash rate unchanged for the remainder of this year, with any further policy adjustment likely to be deferred until 2027.