The Australian economy is expected to grow strongly over 2022 (albeit at a slower pace than previously forecast), as household consumption is supported by strong labour income growth and education and travel services exports pick up.

Further ahead, higher consumer prices, rising interest rates and declining housing prices are expected to weigh on growth in private spending, at the same time as growth in public demand slows. The Australian GDP is forecast to grow by 3.25% over 2022, 1.75% over 2023 and 1.75% over 2024.

Annual Australian Economic Growth

Employment is forecast to grow strongly during 2022 before moderating as growth in activity slows. Since the start of this year, labour market outcomes have been robust and leading indicators of labour demand suggest this will continue in the near term. Participation in the labour force is expected to be sustained at historically high levels over the next three years with the unemployment rate forecast to decline to around 3.25% in late 2022 before rising gradually thereafter. Following the reopening of the international border earlier this year, immigration could help to alleviate labour shortages in some industries over time, while also adding to demand in the economy.

Inflation is now the highest it has been since the early 1990s and is forecast to increase further in the second half of this year. Headline inflation is expected to peak around 7.75% towards the end of 2022, before declining back to the top of the inflation target range by the end of 2024.

With elevation inflation levels, the Reserve Bank of Australia lifted the cash rate in four successive months to 1.75%, or the most since 1994. Most economists forecast the cash rate to peak at 2.6%, before falling in 2023.

Household consumption grew solidly in the first half of 2022 as spending on discretionary goods and services, including hospitality and travel, continued to recover. The resilience in spending partly reflects strong growth in household disposable income. The near-term outlook for consumption continues to be supported by strong labour market outcomes, though growth is forecast to ease over the remainder of 2022 as households’ budgets come under increased pressure from the rising cost of living.

The outlook for business investment remains positive. A large pipeline of residential and non-residential projects is expected to sustain construction activity for at least the next year. However, capacity constraints have intensified in some sectors, which will limit the pace of growth in construction activity for some time.

The outlook for residential investment has been downgraded. Demand for new detached dwellings is expected to be soft as a further decline in established housing prices and high construction costs reduce the incentive to build new dwellings. Prospects for higher density residential projects are brighter, as rental vacancy rates in Sydney and Melbourne have declined and as population growth recovers following the reopening of the international border.

Housing prices have declined in a number of markets in recent months as interest rates have increased and market sentiment has deteriorated. Price declines have been largest in Sydney and Melbourne. In these cities, auction volumes and clearance rates have declined, and the number of properties currently listed for sale is above average.

The reopening of international borders is expected to generate a return to positive net overseas migration and higher population growth, which will support higher consumption growth. Australia’s population is projected to grow by 242,000 in 2022 and 326,000 in 2023 – in line with the 20-year average.

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