The RBA has upgraded its Australian growth forecasts again in the Monetary Policy Statement last week. GDP growth has been racing ahead of the RBA’s forecasts since the economy troughed in mid-2020 creating a ritual of big forecast changes every quarter to peak annual GDP growth in Q2 2021. In the last three quarterly Monetary Policy Statements the RBA has revised upwards Q2 2021 GDP growth from 6% y-o-y in the November 2020 Statement, to 8% in the February 2021 Statement and 9.25% in the latest Statement last week.

After such strong annual GDP growth, a base effect causes a period of moderation. GDP was at an unusually low ebb in Q2 2020 so the annual growth calculation for Q2 2021 off a low base will be unusually large. The base lifted in Q3 2020 as the economy grew sharply. As a result, annual GDP growth will moderate in Q3 and Q4 2021 because of the higher GDP base in both Q3 and Q4 2020 – a much higher base because GDP grew more than 3% q-o-q in both quarters.

One remarkable feature of the RBA’s growth forecast revisions is that the huge 3.25 percentage point lift to forecast Q2 2021 annual GDP growth between the November 2020 Statement and the May 2021 Statement shows no substantive give-back in growth forecasts beyond Q2. In the November 2020 Statement GDP growth was forecast at 5% y-o-y in December 2021 and 4% in June 2022 while the respective forecasts in the latest Statement are 4.75% and 4%, almost identical.

After an exceedingly high peak annual GDP growth rate in Q2 2021 the RBA is forecasting GDP growth to run fast through to at least mid-2022. It is forecasting a boom and that is reflected in other key changes to forecasts of employment and unemployment.

Annual employment growth forecast to rise 3% y-o-y in Q2 2021 in the November 2020 Monetary Policy Statement, was revised upwards to 5.75% in the February Statement and revised up further last week to 6.75%.

The unemployment rate forecast to be 7.5% in June 2021 in the November 2020 Statement was revised down to 6.5% in the February Statement and down further to 5.25% in the Statement last week. The RBA is now forecasting that the unemployment rate will fall to 5% in December 2021 and 4.5% in December 2022.

Despite forecasting a boom in GDP growth and employment the RBA still forecasts only a slow lift in wages. Annual wage growth is forecast at 1.5% y-o-y in June 2021 lifting to 2% in June 2022 and 2.25% in June 2023. These wage growth forecasts underpin the RBA’s still low annual inflation forecasts. After a base-effect surge to 3.25% y-o-y in Q2 2021 annual CPI inflation settles in the RBA’s latest forecasts to 1.75% in Q4 2021 and 1.5% in Q4 2022.

The RBA continues to use its low wage and inflation forecasts as a reason to maintain low official interest rates until at least 2024. Those low interest rates continue to feed housing activity at the leading edge of the boom. The latest data relating to home purchasing activity (housing finance commitments) and future new home building activity (home building approvals) are both in record high territory and rising.

March housing finance commitments rose by 5.5% m-o-m and were up by 55.3% y-o-y. March home building approvals rose by 17.4% m-o-m and were up by 47.4% y-o-y. In the high value-add part of the home building industry, free-standing single homes, approvals were up by 60.6% y-o-y.

When the home building industry is rising fast it places strong demand on labour resources and is often a leader driving up wages. By maintaining low interest rates and providing guidance that low interest rates will last to 2024 at least the RBA is fuelling growth in the booming housing sector. The RBA is also contributing to upward wage pressure in the sector and casting doubt on the credibility of its low wage growth and inflation forecasts.

The more general economic boom being fed by low interest rates is about to add a few calories from more government spending as well. The Federal Government’s Budget next Tuesday looks set to be a free spending affair with multi-billion-dollar new spending announcements related to age care and childcare funding, women, housing, infrastructure spending, and tax for low- and middle-income households. Some of the new spending will foster reform capable of lifting economic capacity longer-term. But it is also hard to escape the fact that new government spending at this stage is pro-cyclical and will feed the boom already under way.

A boom defined as the economy growing for an extended period above its long-term growth potential can be tolerated until it threatens to generate excessive inflation. The RBA is forecasting no likelihood of annual inflation pushing up through its 2-3% target band in 2022 or 2023.

The problem is that the current boom is being fed by low interest rates and government largesse. Excess productive capacity is being used up quickly, especially spare labour market capacity. We see the RBA’s low wage growth and low inflation forecasts coming under greater challenge later this year and in the first half of 2022. A change to the RBA’s interest rate guidance seems inevitable at some point and the way the well-fed boom is developing that change in guidance is on the cards in 2022.