Key insights from the week that was.
At the turn of the week, Chief Economist Luci Ellis and Westpac Economics highlighted how severe the inflationary impact is expected to be for Australia. Recognising the extreme uncertainty surrounding the conflict and the passage of time, we extended our baseline supply assumption from a one to two-month complete shutdown of the Strait of Hormuz followed by a protracted recovery in transit from 20% of pre-conflict supply in May to normal supply at year end. Also, a consequence of elevated refining margins globally, annual Australian consumer inflation is now expected to peak around 6%yr in mid-Q2. While headline inflation will fall back to target over the following year, trimmed mean inflation is forecast to remain above 3.0%yr until end-2027 and only settle in the middle of the target range in late-2028, having peaked at 4.0%yr at end-2026.
With Australia already experiencing tight capacity and elevated domestic inflation pressures, attested to again by the RBA in the March Monetary Policy Board meeting minutes, the Middle East conflict warrants pre-emptive action by the RBA through three 25bp cash rate hikes in May, June and August 2026 to 4.85%. Policy is then seen on hold until 2028, when success with inflation should allow the cash rate to be reduced by 100bps steadily through the year. The consequence for GDP is likely to be a deceleration to just 1.0%yr in 2026, followed by a sub-par 1.6%yr gain in 2027, then an above-trend 2.8%yr recovery in 2028. The unemployment rate is forecast to rise to 5.0% at end-2026, and to take until end-2028 to return to its full employment level, circa 4.5%.
To the above forecasts, time matters a great deal. If, as has been mooted in recent days (and may be confirmed in a Presidential address later today), the Trump administration calls a quick end to the US’ strikes against Iran, Australian GDP and the labour market may receive a reprieve. That said, heightened inflation will remain an acute risk while transit and supply-chain disruptions persist, and businesses may also take the opportunity to re-set margins. The balance between inflation and activity risks will therefore remain in focus for the RBA over the coming year. Ahead of the Federal Budget, the Government’s financial position is also in flux, although current conditions look more likely to prove a positive than negative at this stage.
Local data out this week meanwhile focused on housing. Cotality home values increased a solid 0.6% in March. Although affordability saw a divergence in conditions city by city, with prices down a touch in Sydney and Melbourne as strong growth continued in Brisbane, Adelaide and Perth. Where conditions are weakest, reduced turnover is holding prices up. Dwelling approvals remained volatile in February, a 29.7% monthly gain lifting the annual growth rate to 14%yr. Australia clearly has need for significant, sustained additions to housing supply across our major cities, but affordability and the cost of construction are material risks which are likely to persist into the medium term.
Offshore, the list of data worthy of mention was short this week. University of Michigan consumer sentiment was, unsurprisingly, weak in March, 19% below the 5-year average and 37% under the full-history benchmark. The Conference Board’s measure showed greater resilience but was still weak versus history. That said, ADP private payrolls continued to grow in March, and the retail sales control group recorded a solid gain of 0.5%mth. The ISM manufacturing index for March was also favourable, although the survey only caught the beginning of disruptions related to the Middle East conflict and the detail was also mixed, with production up, new orders down and employment contracting. China’s official PMIs emphasised the nation’s ability to weather uncertainty, with both the manufacturing and services indexes higher in March.
The key international data release for the week is still to come on Friday night. The US March employment report will be closely scrutinised after February’s weak detail reset participants current understanding and expectations for the labour market. US policy makers have been more focused on inflation risks in recent weeks, but another poor employment result could see them reconsider this view. In contrast, a rebound in job creation will likely see market pricing for near-term policy decisions shift materially in favour of a hike, or two, as has been the case elsewhere across the developed world.
