As high inflation fades into the rear-view mirror, has everyone noticed the other signs of a slowing in economic momentum?
The torrent of tariff-related headlines eased this week, allowing markets to take a bit of a breather and the rest of us to focus on other things. In a world of continuous data flow, it is all too easy to get stuck to a previous view or change it only incrementally. Sometimes, though, we should take a step back and more deeply assess what has changed. This week’s CPI data confirmed that the post-pandemic inflation surge is firmly in the rear-view mirror. But have observers, including the RBA, fully absorbed the implications of this change?
Signs of an unchanged mental narrative manifest in many ways. Some might worry about any and all categories of inflation still running above the 2½% target midpoint, as if that were not also true pre-pandemic when overall inflation undershot the RBA’s target for years. Others might extrapolate temporary blips into the future, without having a good explanation for why that blip would continue. Still others fret about a ‘tight’ labour market and ‘strong’ domestic demand.
It is true that Australia’s labour market was tighter than average and did not ease further in the second half of 2024. It is less clear that the latest data support the same characterisation for early 2025. As Westpac Economics colleague Ryan Wells noted at the time, the last two monthly labour force releases were a bit of a mixed bag. Employment was essentially flat, and the participation rate declined. While the latter helped keep the unemployment and underemployment rates low, it was also to be expected as cost of living pressures ease and the additional labour supply to make ends meet becomes less necessary.
Beyond the labour force survey itself, indicators such as job ads and business surveys are easing, and labour market tightness indicators from business surveys have resumed declining after their late-2024 pause. None of this is definitive, but the weight of data is pointing to a possible loss of momentum.
Likewise, it is true that household consumption growth is likely to pick up over the course of the year, as real income growth continues to recover. The crucial question is not whether this pick-up happened at all, though, but rather how large it will be. We are currently forecasting consumption growth over the year to the December quarter 2025 at 1.5%, the same as the median forecast of other market economists. Importantly, the RBA’s February forecast, at 2.6%, was noticeably above even the highest private-sector forecast, even after a downward revision from 2.9% in the November 2024 round. When assessing the outlook and its policy implications, then, we need to go beyond detecting whether spending has picked up at all and evaluate how that pick-up compares to our current view.
So far, a range of early indicators would suggest that consumption has not picked up as much as the RBA’s current forecast would imply. Card spending measures and the broader ABS Household Spending Indicator got off to a slow start in 2025. Perhaps even more salient, our Westpac DataX Consumer Panel (PDF 516KB) continues to indicate that people are spending less out of the extra income from the tax cuts – just 20 cents per extra dollar of take-home income once the Q1 data are incorporated – than historical experience would suggest. Real (inflation-adjusted) spending per person was broadly flat in the March quarter, according to the Panel. The strength in household deposit growth recently is consistent with households saving much of the extra income, at least for now.
None of these data points are truly definitive; rather, they are more like jigsaw puzzle pieces. Collectively, though, they point to some loss of momentum in the labour market from the surprisingly robust second half of last year, and less of a pick-up in momentum from the consumer than earlier believed.
A common thread here is the simultaneous loss of momentum in population growth. We have long predicted that the surge after the international borders reopened would roll over, and population growth would normalise. As it has turned out, the slowdown in population growth has been a bit sharper than leading indicators implied (PDF 3MB). The official data show growth in the estimated resident population already down to 1.8%yr in the September 2024 quarter, from a peak of around 2½%yr a year previously. Both we and the RBA had previously expected 2.0%yr for calendar 2024. Softer labour demand being matched by lower supply, along with relatively subdued increases in consumption growth, could both be consistent with that unwind in population growth continuing into 2025.
These subtler shifts in momentum will of course be swamped by shifts in the outlook coming from recent developments overseas. It will therefore be all too easy to let them slip by and fail to learn from them. It is best, then, to take a breath and examine all those jigsaw puzzle pieces and see how they fit together.
