The Australian economy has slowed in response to elevated inflation and higher interest rates here and the impact of global economic volatility. These factors have put people under pressure, weighing on consumption growth and dwelling investment.

Household consumption was flat over the past year, as people have responded to cost-of-living pressure by pulling back on discretionary spending to make room for essentials. Higher interest rates and elevated construction costs are weighing on the demand for new housing, with dwelling investment expected to contract further.

Australian economic growth is expected to remain subdued over the next four years. Real GDP is forecast to grow by 1.75% this year before improving to 2.25% in 2025 and 2026. Higher wages growth, the forecast moderation in inflation, continuing employment growth and the Government’s cost‑of‑living tax cuts should support real household disposable incomes and a recovery in household consumption.

Australian Economic Growth_Q2_2024

Households have pulled back sharply on consumer spending in response to sustained cost-of-living pressures and higher interest rates. Looking ahead the cost‑of‑living tax cuts are expected to support real household disposable incomes and household consumption from the second half of 2024.

Although inflation remains elevated, it has moderated substantially and is now less than half of its peak in 2022 having occurred more quickly than forecast. The cash rate is assumed to gradually ease from around the middle of 2025 to reach 3.6% by the middle of 2026.

Recent growth in business investment has been underpinned by strong business balance sheets and resilient business sentiment. The upswing is expected to continue through to 2026. The positive outlook for business investment is reflected in the forward-looking capital expenditure intentions with business investment forecast to grow by 5.5% this year.

While the labour market has been resilient in recent years, with faster employment growth than any major advanced economy, conditions are softening and are expected to ease further over the next 12 months. The unemployment rate is expected to remain low by historical standards but rise gradually to 4.5% by mid-2025.

Higher interest rates and elevated construction costs are weighing on the demand for new housing. These factors are expected to cause dwelling investment to contract in 2024 before stabilising in 2025. Alongside an improvement in household finances and asset returns, growth in new dwelling investment is expected to increase in 2026.

Government initiatives to increase housing supply will help to support an increase in the stock of dwellings. The Government’s $32 billion housing plan will deliver the biggest investment in social housing in over a decade with the ambition of the Australian and state governments’ to collectively deliver 1.2 million new homes over the next five years.

Copyright © 2024 by Urban Property Australia All rights reserved. No part of this publication may be reproduced in any form, by microfilm, xerography, electronically or otherwise, or incorporated into any information retrieval system, without the written permission of the copyright owner.