Economic growth has been running ahead of potential, with labour shortages and inflationary pressures mounting. Higher interest rates will damp domestic demand through the coming year, although this will be offset by the income effects of the “working for families” package. Increased business investment will help ease capacity constraints and pave the way for higher productivity growth and increasing real wages. Demand also continues to be boosted by a vigorous expansion in government consumption.

With the pace of activity now slowing, the recent monetary tightening should be sufficient to limit inflation, given the appreciation of the exchange rate. But additional fiscal stimulus beyond that already planned could put the projected soft landing at risk and would need to be offset by higher interest rates in order to bring the economy back onto a sustainable growth path.