Good morning. It’s a pleasure to be here today and I would like to thank UBS for the invitation to speak at this year’s Australasia Conference.
Today I would like to talk about two topics. The first is how we see the outlook for the Australian economy. The second topic is the balance in the labour market, where I want to follow up on a recent speech by the Governor to say a bit about approaches we use to assess where we are relative to full employment.
However, before turning to what lies ahead, I’d like to look briefly in the rear-view mirror.
We recently reviewed our economic forecasts for the year just past. This annual exercise is always revealing, but the biggest lesson is usually that humility is important when forecasting. That was particularly so a year ago, as the steep rise in inflation in 2022 had caught many forecasters by surprise, and not just here in Australia.
Fortunately, the difference between what happened and what we expected a year ago is less dramatic this time around. In very broad terms, the Australian economy has evolved more or less as we expected a year ago. GDP growth has slowed, labour market conditions have eased a little and headline inflation has fallen from its peak of close to 8 per cent in late 2022 to just under 5½ per cent in the most recent data (Graph 1). This fall was driven by lower goods price inflation as global supply chain issues improved. However, inflation is still too high and underlying inflation is higher than expected a year ago (Graph 2). This reflects strong domestic cost pressures and a still-robust level of aggregate demand. Prices of many services have been rising briskly in Australia. I also want to note that services price inflation has been slow to decline in many other economies.