Australia's macroeconomic outlook: Challenges and opportunities

This report provides a comprehensive analysis of Australia's macroeconomic landscape, tailored for forex traders. It is structured to provide insights into key economic drivers, including fiscal and monetary policy, the current economic situation, and geopolitical factors, across various time horizons: near-term (five-day outlook), short-term (five-week outlook), mid-term (five-month outlook), and long-term (five-year outlook).

Australia's macroeconomic environment presents a mixed picture for forex traders. Historically, the nation's economy has been heavily influenced by commodity prices, given its significant role as a commodity exporter. This creates intermarket dependencies, with the Australian dollar often strengthening during periods of rising commodity prices, which also tend to support the stock market and, to a lesser extent, bond yields. Currently, market sentiment is cautious, as traders weigh the impact of slowing global growth, particularly in China, against the Reserve Bank of Australia's (RBA) commitment to curbing inflation.

A complex geopolitical landscape

Australia's geopolitical environment is increasingly complex, characterised by heightened tensions between major powers, particularly in the Indo-Pacific region. This has implications for the nation's macroeconomics, as it navigates its alliances and trade relationships.

The most significant geopolitical event shaping Australia's macroeconomics in the past six months has been the ongoing conflict in Ukraine. The war has disrupted global supply chains, contributed to higher energy prices, and increased geopolitical uncertainty. Australia has joined its Western allies in imposing sanctions on Russia and providing support to Ukraine.

Over the past five years, the rise of China as a global power has been a key geopolitical development shaping Australia's macroeconomics. The two countries have strong economic ties, but there have also been growing tensions over trade, security, and human rights. Australia has sought to balance its economic interests with its security concerns, strengthening its alliance with the United States and participating in regional security initiatives.

Looking ahead, the geopolitical outlook for Australia remains uncertain. The conflict in Ukraine is expected to continue, and tensions with China are likely to persist. Australia will need to carefully navigate these challenges, balancing its economic and security interests.

Ongoing geopolitical events

• The conflict in Ukraine and its impact on global commodity markets and supply chains.

• Australia's relationship with China and the potential for further trade disputes.

• The AUKUS security pact and its implications for regional security and defence spending.

Navigating fiscal prudence amidst economic headwinds

Australia's fiscal policy is currently characterised by a focus on fiscal consolidation, aiming to reduce government debt and maintain a sustainable budget position. This is influenced by a number of factors, including the global economic slowdown, high inflation, and the need to rebuild fiscal buffers. The most recent event related to fiscal policy is the release of the 2024-25 Budget, which includes measures to ease cost-of-living pressures, build more homes, and invest in a "Future Made in Australia." The budget projects a second consecutive surplus in 2023-24, followed by a return to deficits in subsequent years.

Over the past six months, the government has focused on balancing fiscal prudence with targeted support for households facing cost-of-living pressures. The 2023-24 Budget, released in May, included significant tax cuts, energy bill relief, and increased Commonwealth Rent Assistance payments. These measures aimed to provide relief to households without adding to inflationary pressures.

In the past five years, the government has implemented a range of fiscal policies aimed at supporting economic growth and job creation. These include tax cuts for businesses, investment in infrastructure, and measures to boost innovation. The government has also taken steps to address long-term fiscal challenges, such as the ageing population and climate change.

Looking ahead, fiscal policy is expected to remain focused on consolidation in the short-to-mid-term, with the government aiming to reduce debt and rebuild fiscal buffers. This may involve further spending restraint and revenue measures. However, the government is also likely to continue providing targeted support to households and businesses facing economic challenges.

Upcoming fiscal events

• Release of the Final Budget Outcome for 2023-24: Week of 36.

• Mid-Year Economic and Fiscal Outlook: Week of 48.

• Release of the 2025-26 Budget: Week of 19.

Resilience and rebalancing

Australia's economic situation is characterised by a period of transition, as the economy adjusts to higher interest rates, slowing global growth, and persistent inflationary pressures. Domestic demand has been more resilient than expected in early 2024, driven by stronger-than-anticipated household and public consumption. However, the drag from net trade, reflecting robust imports growth and softer exports, led to weaker-than-expected GDP growth of 0.1% in the March quarter.

Over the past six months, key economic indicators have shown a mixed picture. Inflation has moderated but remains above the RBA's target range, while the labour market has eased gradually but remains tight. The housing market remains tight, with housing prices rising more briskly than expected in recent months and advertised rents continuing to grow strongly.

The past five years have seen significant shifts in Australia's economic landscape. The economy experienced a period of strong growth prior to the COVID-19 pandemic, followed by a sharp contraction in 2020. The recovery from the pandemic has been robust, but the economy is now facing new challenges from high inflation and interest rates.

In the short-to-mid-term, the economic outlook is for a gradual easing in growth as the impact of higher interest rates continues to be felt. Inflation is expected to moderate further but remain above the RBA's target range for some time. The labour market is expected to continue to ease, with the unemployment rate rising gradually.

Upcoming economic events

• Release of the July Monthly CPI Indicator: Wednesday, August 28, Week 35.

• Release of the June quarter National Accounts: Wednesday, September 4, Week 36.

The RBA's monetary policy stance

The RBA's monetary policy is currently in a holding pattern, as the central bank assesses the impact of past rate hikes and the evolving economic outlook. The RBA's mandate is to maintain price stability, full employment, and the economic prosperity and welfare of the Australian people. The central bank uses a range of monetary policy tools, including the cash rate, to achieve its objectives.

The most recent event related to monetary policy was the RBA's decision to leave the cash rate unchanged at 4.35% at its August meeting. This marked the sixth consecutive meeting where the RBA has held rates steady, as it assesses the impact of past rate hikes and the evolving economic outlook. The RBA noted that inflation remains above target and is proving persistent, but also acknowledged the uncertainty surrounding the economic outlook.

Over the past six months, the RBA has raised the cash rate by a cumulative 125 basis points, from 3.10% in February to 4.35% in August. This tightening cycle was aimed at curbing inflation, which has been driven by a combination of strong demand, supply chain disruptions, and higher energy prices.

In the past five years, the RBA has navigated a period of historically low interest rates, as it sought to support the economy through the COVID-19 pandemic. The cash rate was lowered to a record low of 0.10% in November 2020 and remained at that level until May 2022, when the RBA began its current tightening cycle.

Looking ahead, the outlook for monetary policy is uncertain. The RBA has signalled that it is prepared to raise rates further if needed to bring inflation back to target. However, the central bank is also likely to be mindful of the risks to economic growth from higher interest rates.

Australia's macroeconomic outlook

The short-term and mid-term macroeconomic outlook for Australia is for a gradual easing in growth, as the impact of higher interest rates continues to be felt. GDP growth is forecast to be 1.7% in 2024 and 1.9% in 2024-25. Inflation is expected to moderate further but remain above the RBA's target range for some time, with trimmed mean inflation forecast to be 3.5% in December 2024 and 3.1% in June 2025. The labour market is expected to continue to ease, with the unemployment rate rising gradually to 4.3% by December 2024 and 4.4% by June 2025.

The key risks to this outlook are a more persistent period of high inflation, a sharper-than-expected slowdown in household consumption, and a more material easing in the labour market. A more persistent period of high inflation would likely require further monetary policy tightening, which could weigh on economic growth. A sharper-than-expected slowdown in household consumption would also dampen growth, while a more material easing in the labour market would increase the risk of a wage-price spiral.

Upcoming macroeconomic Events

• Release of the June quarter National Accounts: Wednesday, September 4, Week 36.

• Release of the July Monthly CPI Indicator: Wednesday, August 28, Week 35.

Key takeaways

The Australian economy is at a crossroads, facing a complex interplay of domestic and global challenges. While the near-term outlook is for continued growth, albeit at a slower pace, the path ahead is fraught with uncertainty. The RBA's commitment to curbing inflation, the potential for a sharper-than-expected slowdown in household consumption, and the evolving geopolitical landscape all pose significant risks to the economic outlook. Forex traders should closely monitor these developments, as they will have implications for the Australian dollar and other asset classes.

Economic indicators reference

Economic growth

• GDP Growth Rate: Expanded 0.1% qoq in Q1 2024, slowing from 0.3% in Q4 2023. Forecast to be [insert forecast based on available data and projections] by the end of Q2 2024 and trend around 0.6% in 2025 and 0.5% in 2026.

• GDP Annual Growth Rate: Expanded 1.1% yoy in Q1 2024, easing from 1.6% in Q4 2023.

Price changes (inflation)

• Monthly CPI Indicator: Rose 3.8% yoy in June 2024, down from 4% in May. Forecast to be 3.8% by the end of Q2 2024 and trend around 2.1% in 2025 and 2% in 2026.

• Inflation Rate: Rose to 3.8% yoy in Q2 2024 from 3.6% in Q1.

• Trimmed Mean Inflation Rate: Rose 3.9% yoy in Q2 2024, down from 4% in Q1.

Labour

• Employment Change: Advanced by 58.2 thousand in July 2024, up from 52.3 thousand in June.

• Unemployment Rate: Increased to 4.2% in July 2024 from 4.1% in June.

Housing

• Housing Credit MoM: Rose 0.4% mom in June 2024, matching the pace in May.

• Building Permits MoM: Plunged 6.5% mom in June 2024, shifting from a 5.7% growth in May.

• Home Loans: Rose 0.5% mom in June 2024, defying market estimates of a 1.0% fall.

Business confidence

• NAB Business Confidence: Dropped to 1 in July 2024 from 3 in June. Expected to be 2.00 by the end of Q2 2024 and trend around 5.00 in 2025 and 4.00 in 2026.

Consumer sentiment

• Westpac Consumer Confidence MoM: Rose 2.8% mom to 85.0 in August 2024, a reversal from a 1.1% fall in July.

Trade

• Balance of Trade: Increased to AUD 5.59 billion in June 2024 from AUD 5.05 billion in May. Expected to be AUD 8.2 billion by the end of Q2 2024 and trend around AUD 11.1 billion in 2025 and AUD 10.4 billion in 2026.

Sources

• Reserve Bank of Australia.

• Australian Bureau of Statistics.

• Australian Government Budget Papers.

• Trading Economics.

• Westpac Banking Corporation.

• Melbourne Institute.

• National Australia Bank.

• S&P Global.

• Australian Industry Group.

• CoreLogic.