As the treasurer, Jim Chalmers, unveils the government’s midyear economic and fiscal outlook (Myefo), it has become evident that the Australian economy is grappling with a myriad of challenges. The much-anticipated rebound in growth appears to be losing steam, prompting economists and policymakers to reevaluate their projections and strategies.
Growth Forecasts Trimmed as Economy Sputters
Myefo has slashed the growth forecast for the current fiscal year by a quarter of a percentage point to 1.75%, signaling that the economy’s momentum is waning. This downgrade is largely attributed to the underwhelming third-quarter gross domestic product (GDP) growth, which languished at a mere 0.8% annual pace.
The Reserve Bank of Australia (RBA), which is set to update its own projections before the next board meeting in February, had previously anticipated growth to accelerate to 2.3% by June. However, in light of the latest figures, the central bank is likely to follow suit and revise its expectations downward.
Household Consumption Takes a Hit
One of the most significant misses in recent forecasts by both the RBA and treasury was the subdued growth in household consumption. Myefo has halved its projected growth in this crucial economic component from 2% to 1% for the current fiscal year, suggesting that consumers are exercising caution and saving more than anticipated.
“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,” notes a close source.
Government Rebates on the Horizon
In an effort to provide relief to struggling households and businesses, the government appears to be considering additional rebates in the coming year. These measures are expected to help suppress the headline inflation rate, which Myefo projects will ease from 3.8% last June to 2.75% by the next one.
Whether these rebates will take the form of another round of electricity bill relief or other targeted assistance remains to be seen. However, it is clear that the government recognizes the need to support those most affected by the economic slowdown.
Labor Market Resilience Defies Expectations
Amid the economic headwinds, the Australian labor market has consistently outperformed expectations. Myefo maintains the unemployment rate forecast of 4.5% for both June 2024 and June 2025, aligning with the RBA’s projections.
However, with the jobless rate easing back to 3.9% in November, it would require a significant slowdown in job growth for it to rise to the predicted levels. Moreover, the participation rate hovers near a record high above 67%, suggesting that more Australians are actively engaged in the workforce.
China’s Economic Woes Weigh Heavily
Australia’s economic fortunes are closely tied to the performance of its largest trading partner, China. The downgrade in Australia’s GDP growth can be largely attributed to China’s lackluster rebound from its Covid-related disruptions and the limited success of its stimulus measures.
China’s struggles, particularly in its massive real estate market, have led Myefo to slash Australia’s export growth target for this year from 5% to a paltry 1%. The reversal in net exports’ contribution to GDP growth from a positive 0.5 percentage points to a 0.25 percentage point reduction underscores the extent of China’s impact on the Australian economy.
“[Developments] in China continue to present downside risk to Australia’s export sector,” Myefo warns, hinting at the uncertainties that lie ahead.
Interest Rate Relief on the Cards
As the economy grapples with the challenges outlined in Myefo, all eyes are on the RBA and its interest rate decisions. Prior to the release of the midyear budget update, markets were pricing in a two-in-three chance of a 25 basis point cut to the cash rate at the RBA’s February board meeting.
While Myefo’s revisions may not drastically alter these expectations, the overarching message is clear: the economy’s rebound is losing momentum, and the RBA has acknowledged this reality. A moderate inflation result for the December quarter could trigger a rate cut as early as February, providing much-needed relief to borrowers and businesses alike.
As Australia navigates the complex economic landscape painted by Myefo, policymakers and market participants will closely monitor key indicators, geopolitical developments, and the RBA’s response. The path ahead may be fraught with challenges, but with timely and targeted interventions, Australia can weather the storm and chart a course towards sustainable growth.
