RBA still likely to argue demand is exceeding supply
Updated RBA estimates of spare capacity suggest that demand still exceeds supply, both in terms of activity and the labour market.
Updating RBA estimates of the output gap, RBA rhetoric on demand running ahead of supply seems unlikely to change much in the wake of slow growth in output in Q3.
Many market economists seem to think that the RBA’s concern over demand exceeding supply is no longer justified given GDP growth came in slightly below the RBA’s latest forecast.
However, barring the RBA significantly revising its calculation of potential output, we estimate that the average of the RBA’s range of estimates of the output gap remains positive at about ½%.
This is partly because the level of output was revised slightly higher over recent years even as GDP grew by slightly less than anticipated by the RBA.
Moreover, if the RBA’s outlook is broadly realised, the RBA still does not expect any slack to open up in the economy, with the average estimated output gap becoming more positive over time, picking up to about 1¼% by the end of 2025 and around 1½% by the end of 2026.
The same holds for expected spare capacity in the labour market, with the RBA not forecasting either the unemployment rate or the hours-based measure of labour market utilisation to exceed its average NAIRU equivalent over the next couple of years.
As we have previously argued, the RBA's forecast of demand continuing to exceed supply, both in terms of economic activity and the labour market, raises the risk that inflation takes longer to sustainably return to the 2½% midpoint of the inflation target range.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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