• Labour market and inflation forecasts remain steady; Q2 GDP growth revised slightly up on stronger household spending.
• Growth expected to return to trend over 18 months, with low unemployment and inflation stabilising at 2.5%.
• Rate cuts of 25bp anticipated in November and February, reaching 3.1% by early 2026.
• Global risks persist, but domestic data shows minimal impact so far.

The domestic data flow over the past month has provided greater confidence in our forecast of a gentle acceleration in GDP growth in coming quarters. June activity data showed a pickup in household spending, a solid rise in building approvals and a decent lift in credit growth. Growth in house prices has started to accelerate in Q2, and the composite PMI for Australia has lifted almost 3 points so far this year. The NAB business survey has improved in recent months, with the July survey showing better outcomes in previously weak sectors and regions (retail, construction and Victoria). In summary, we are encouraged by the breadth of improvement in the domestic activity data in the past month or so.

The labour market remains resilient, with the unemployment rate at 4.2% and growth in employment running at 1.8% over the past year. Forward indicators of labour demand are largely tracking sideways. Core inflation has continued to sustain a gradual descent, with the June quarter measure rising 0.6% q/q. Shelter components were a key driver of earlier declines in inflation but have likely troughed. A faster pickup is a risk, but broader conditions are consistent with overall inflation sustaining near target.

On net, this leaves our outlook for the economy broadly unchanged. We expect another year of below trend growth in 2025 and forecast GDP growth to accelerate to around trend over 2026. We expect the unemployment rate to drift up modestly, peaking at 4.4% in late 2025 before falling back to 4.25% in 2026. We still expect inflation to settle around 2.5% from H2 2025.

Risks to our forecasts for the Australian economy remain balanced. On the downside, we are mindful of elevated global risks to activity and the likelihood that additional US tariffs would be disinflationary for Australia. The upside stems from a stronger-than-expected run of domestic data. We expect the RBA to deliver quarterly easings in November and February, taking the cash rate to 3.1% by early 2026.

Read more in The Forward View Australia – August 2025.