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GDP to fall but ‘rapid rebound’ will resume as lockdowns end, says NAB

As a result of the ongoing lock down in Sydney and periods of disruption elsewhere, we expect to see a large hit to activity in the September quarter and for the labour market to retrace some of the recent gains.

That said, the ongoing support from both fiscal and monetary policy as well as healthy momentum leading into the current lockdowns will likely see a rapid rebound as restrictions are removed. A rapid rebound as well as ongoing strong growth will see the economy catch up over 2022 so that the level of GDP is broadly similar to our previous set of forecasts (by end 2022).

This implies growth of around 2.1% over 2021, 4.5% over 2022 and a moderation to 2.1% in 2023. On the labour market, we see unemployment rising to just over 5.5% in the near term, before resuming its recovery, ending 2022 at around 4.5% and 2023 closer to 4%.

Alongside the rapid rebound and following expansion in the economy, we see spare capacity continuing to be eroded over the next couple of years, with wage growth beginning to strengthen and underlying inflation returning to the lower part of the target band by early 2023. This would be the first time inflation has sustainably reached the band in a number of years.

We see monetary policy remaining exceptionally easy for an extended period, as the RBA waits for hard evidence that inflation has returned sustainably to the target band. However, while we expect the cash rate to remain on hold until early 2024, we expect QE to continue to be tapered gradually – with the program eventually wrapping up in mid-to-late 2023.

While monetary policy is expected to remain easy, fiscal policy is likely to continue to play a key role in supporting the economy in the near term. The last year has shown how effective direct support to both households and business is, in providing a buffer until restrictions are eased. It is likely the budget will remain in deficit for a significant period, and we do not expect the government will move towards a phase of repair until further significant progress has been made in reaching full employment.

There remains significant ongoing risks around our forecast. On the activity side, further major outbreaks could weigh on growth and therefore see slower progress on reaching full employment. Further, there is likely to have been some pull-forward of investment in both dwellings and businesses as a result of current fiscal policies. How big and how soon a resulting hole emerges remains uncertain. On the inflation front, the level of full employment remains uncertain as does the pass through of greater wage pressure from margins to output prices.

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