Members began discussing international economic conditions with an indication of an improved balance of risks to global growth in recent weeks. Although growth metrics in the national accounts of most advanced economies remain weak, some forward-looking indicators show relative improvement. It should be noted that the United States was the exception, as it witnessed strong growth that did not decline significantly in 2024 compared to the strong rates of 2023. Members noted that the labor market in the United States has noticeably strengthened in recent months, while the labor markets in most other advanced economies continue to be in control. Strict.
Despite the gradual easing undertaken, inflation in advanced economies continued to outperform targets set by central banks. Despite the significant declines, progress in combating inflation appears to have stalled, at least temporarily in some cases. Basic services inflation remains high, and recent US inflation data has surprised with its upward trend. Members discussed how persistent service price inflation could hinder the process of restoring inflation to the target level, especially in countries where signs point to the end of low commodity price inflation.
China’s economic growth picked up early in the year and appears to be on track to meet its 2024 growth target of around 5 percent. Some of this success can be attributed to higher net exports. However, members noted that conditions in the real estate market remain very weak, and that political support will remain necessary to offset the negative impact on GDP growth.
Prices of iron ore, coke and base metals have been rising since the previous meeting, due to a combination of China’s stronger economic outlook and tighter supply. Staff forecasts for likely trade growth with Australia’s major trading partners have changed little since the February meeting. Consumer spending is weaker than expected in the first quarter of 2024
Consumer spending remained weaker than expected in the first quarter of 2024, but in contrast, real household disposable income began to stabilize at a somewhat higher level than expected. Households appear to have maintained a higher savings rate than expected, with some households reducing their spending due to income constraints, while many simply chose to reduce spending. The relative importance of higher returns on savings and greater than usual uncertainty among households in driving this outcome, with its impact on output and inflation expectations, has been debated.
Business investment and public sector spending saw strong growth, with private non-residential construction, investment in software and other forms of intangible assets contributing significantly to the overall growth in business investment. Members acknowledged the difficulty of determining the shares of this investment directed either to enhancing productivity such as artificial intelligence, to mitigating risks such as cybersecurity, or to complying with specific obligations. Labor market conditions have also improved less than expected three months ago, with the unemployment rate remaining modestly higher than its lows in late 2022 and a decline in average working hours and job vacancies showing a larger decline.
Members discussed the degree of spare capacity in the economy, which was the key judgment required for future projections. They pointed to experts’ assessment that the level of demand exceeded supply at the end of 2023, although the gap narrowed relatively quickly due to weak growth; It was also noted that such measures are subject to material uncertainty. Labor market conditions appear to be more stringent than those consistent with full employment, based on historical comparisons of a range of labor market indicators, model-based estimates, and information from business surveys. Members discussed the implications of developments in wages and productivity for their assessment of the level of full employment.
Consumer spending is weaker than expected in the first quarter of 2024
Inflation fell further in the March quarter compared to the period ending last year, but the pace of inflation decline has slowed and the latest inflation data was stronger than expected in February. Domestic and non-labor cost pressures remained high. Commodity price inflation has eased further over the previous months, but the transmission of the previous softening in import price growth to domestic consumer prices now appears to have been largely complete. Service price inflation has peaked but remains high, especially for lower services
Consumer spending remained weaker than expected in the first quarter of 2024, while real household disposable income began to stabilize at a somewhat higher level than expected. It is striking that families maintained a higher savings rate than expected, as some families chose to reduce their spending in the face of income constraints, while many simply chose to reduce their spending. Members discussed the relative importance of higher returns on savings and greater than usual uncertainty among households in determining this outcome, which affected expectations for output and inflation.
Business investment and public sector spending saw strong growth, with private non-residential construction, investment in software and other forms of intangible assets being important contributors to the overall growth in business investment. Members acknowledged the difficulty of determining the shares of this investment, which aims either to enhance productivity such as artificial intelligence, or to mitigate risks such as cybersecurity, or to comply with specific obligations, which affects economic results.
Labor market conditions have improved less than expected three months ago, with the unemployment rate continuing to rise modestly from its lows in late 2022, and average working hours and job vacancies showing declines. Demand was stronger for skilled labor and in government-related sectors, and the reason for this was discussed was the resilience of employment growth.
Monetary policy considerations
Turning to considerations related to the policy decision, members noted that most of the data received since the previous meeting had been stronger than expected. Together, these data suggest that there may be somewhat less of a recession in the economy than previously assessed. Australia’s inflation rate has fallen more slowly than expected. Labor market conditions had improved less than expected over the previous months and were more stringent than those consistent with full employment. Internationally, data on both economic growth and inflation tended to beat expectations, and the near-term outlook for output growth improved in some major economies. The main exception to this trend of stronger-than-expected data relates to consumer spending in Australia, where data pointed to continued weakness through 2024.
Financial conditions in Australia were judged to be restrictive. Expectations have increased about the future path of interest rates both domestically and in the United States, and as a result financial conditions have tightened. Market pricing no longer implies a fall in the cash rate in 2024, and the value of the Australian dollar has risen modestly, although remaining within its recent range.
Members noted that experts’ forecasts still pointed to inflation returning to target within the same time frame as expected in February, but this was based on a technical assumption of the cash rate that was significantly higher than previously assumed. Expectations were that production growth would remain weak in 2024, bringing total demand and supply closer to balance. Labor market conditions are expected to gradually moderate, and the unemployment rate is expected to be consistent with full employment by mid-2025.
