Australia Economic Outlook
The economy should have cooled in Q4 2022. Retail sales contracted in sequential terms in the quarter, as spending was restrained by falling consumer sentiment and soaring inflation. That said, an extremely tight labor market should have cushioned the spending squeeze. On the production front, higher interest rates and plunging business sentiment point to weaker investment activity. Moving into the current quarter, available data paints a mixed picture. Business sentiment improved in January, while consumer sentiment remained considerably downbeat in January–February. More positively, China’s decision to no longer recognize online degrees from overseas colleges has translated into rising inflows of Chinese students, which is seemingly supporting services consumption. In other news, in early February, Chinese authorities reiterated their willingness to improve bilateral ties with Australia.
Annual inflation came in at 7.8% in Q4, up from Q3’s 7.3%, hitting the highest reading since Q2 1990. Therefore, inflation moved further above the Reserve Bank’s 2.0–3.0% target band. Inflation is set to ease but remain above target this year, fed by faster wage growth, statistical carryover and pass-through effects from higher production costs.