Among those poring over today’s release of the Albanese government’s midyear budget scorecard will be Reserve Bank economists and those millions of borrowers holding out for early interest rate relief.
Here are some of the key economic takeaways from the midyear economic and fiscal outlook:
Lower growth forecasts will trigger cascading revisions
The weaker-than-predicted third-quarter gross domestic product (GDP) growth result was probably the nadir in this part of the budget cycle, with annual expansion running at a 0.8% pace.
That meagre pace sapped some of the expected rebound momentum, with Myefo now trimming growth by a quarter of a percentage point to 1.75% for this fiscal year.
The RBA, which will update its projections before next board meeting on 17-18 February, had pencilled in a quickening in the growth pace to 2.3% by next June. As its model contains similar sensitivities to treasury’s, we can anticipated a markdown there too.
Household consumption was one significant “miss” by the RBA (and treasury) in its recent forecasts as residents squirrelled away more of the stage 3 tax cuts than economists had anticipated.
Myefo halved its projected growth in such consumption (the largest part of the economy) from 2% in the May budget for the current fiscal year to 1%. Its growth forecast for 2025-26 is also pared back from 2.75% to 2%, implying household caution will continue.
The RBA’s own consumption projects basically mirrored the government’s, so expect cuts to come.
More rebates on the way
Much was made by some pundits about the RBA forecasting consumer inflation would quicken in the coming year – a trend that would typically forestall interest rate cuts.
However, the central bank was merely assuming big rebates, such as for energy, wouldn’t be repeated. The biggest electricity bill relief was showered by state governments, particularly in Queensland and Western Australia, ahead of polls, and they may well be one-offs.
More commonwealth rebates seem to be pencilled for the coming year, helping to suppress the headline inflation rate at least. (Whether the government will repeat the $300/household electricity handout or some other rebate remains to be announced.)
According to Myefo, CPI will ease from 3.8% last June to 2.75% by the next one, and remain there out to June 2026. That figure is within the RBA’s 2%-3% inflation target (and contrasts with their present forecast of a pick-up in CPI to 3.7% by December 2025 and 3.1% by the following June).
Myefo states the electricity and rental rebates “redirectly reduced annual inflation in the September quarter 2024 by half of a percentage point”.
To be sure, the RBA pays more attention to “underlying inflation” than CPI. (The former sank in the September quarter, but picked up slightly in the less-comprehensive monthly numbers for October.)
Rebates typically stoke demand in the economy even if there’s a suppression effect for those whose incomes are tied to CPI, such as pensions and other assistance.
Labour market may surprise again
If there’s one area of consistent underestimation it’s been the strength of the labour market, and Myefo may expend that recent tradition.
True, the updated forecasts retain the 4.5% unemployment rate for next June, and the June after that. (The RBA has estimates of 4.4% and 4.5%, respectively, for those two periods.)
But the jobless rate eased back to 3.9% in November and would need a sharp slowdown in jobs growth for it to increase 0.6 percentage points over the next seven months. Myefo also lifted the pace of employment growth to 1.75% for this fiscal year from 0.75% predicted in the budget.
The participation rate has been hovering near a record above 67% for some time. Myefo reckons that will ease back to 66.75% by next June, a small tweak (and a revision upwards) but a trend that all else being equal would usually slow the rise of the unemployment rate.
The latest business surveys also point to employers keen to hold staff or hire more. In that light, Myefo reduction in the wage price index gain – from 3.25% to 3% for both this fiscal year and next – seems a tad pessimistic too.
China’s central role
The downgrade of Australia’s GDP owes much to China’s underwhelming rebound from the Covid contortions, and the limited success of its slew of stimulus packages since.
China buys more than a third of Australia’s exports – and much of the exports of nations such as Japan and South Korea, which also are near the top of Australia’s export table.
The China funk – concentrated on its giant real estate market – has prompted Myefo to cut export growth target this year from 5% in the budget to just 1%. Net exports (the difference of shipments out versus imports) went from a forecast 0.5 percentage point contribution to GDP growth this fiscal year to a reduction of 0.25 percentage points – hence, the wider drag.
Moreover, “[developments] in China continue to present downside risk to Australia’s export sector”, Myefo states. And that’s the bit we can vaguely project – before Donald Trump retakes the White House next month, packing threats of steep tariffs on China in his luggage.
“Protectionism and strategic competition between the United States and China present challenges to global trade, and geopolitical tensions increase the potential for a sharp commodity price shock (including for oil),” Myefo said.
And those interest rates
Before the release of Myefo, markets were rating the prospect of an RBA cut of 25 basis points to its 4.35% cash rate at its February board meeting as a two-in-three chance.
They had also tipped such a cut would be a certainty by the following meeting that ends 1 April.
On the face of it, Myefo won’t change expectations greatly. There is a modest $1.3bn reduction in the predicted size of the budget deficit but in a $2tn-plus annual economy that’s a ripple. Future forecasts have even less value given the global and local uncertainties.
The biggest message, though, is the economy’s rebound won’t be as strong as anticipated. The RBA governor, Michele Bullock, has already acknowledged that (how could she not?)
A moderate inflation result for the December quarter – when the ABS releases the numbers on 29 January – could yet trigger a February interest rate cut. If not one isn’t far away.
As Myefo notes – echoing as it has to the market forecasts – the cash rate is “assumed to decline to 3.6% by the middle of 2026”. That’s just three rate cuts over the next 18 months – unless the economy slows even more than Myefo predicts, which might not be so welcome.
