Morgan Stanley: Forecast Update — Shocking Supply

Morgan Stanley updated its Australian economic forecasts to reflect an ongoing global energy supply shock. The firm expects inflation to peak at 5.0% in Q2, with core inflation remaining above target at 3.3% year-over-year. Despite a hawkish RBA stance, Morgan Stanley anticipates that the necessary economic slowdown will materialize faster than the central bank expects, keeping rates on hold. The 2026 GDP growth forecast was revised down to 1.2% year-over-year, while the unemployment rate estimate was raised to 4.7%. Consumer confidence has fallen to its lowest level since 1973, and the preliminary composite PMI entered contraction territory for the first time since 2023. The May budget may include demand-side measures, but proposed tax increases on wealth and investments will likely limit overall support. Households face a dual squeeze from rising fuel costs—roughly a 0.8 percentage point drag on disposable income—and domestic policy tightening. While the cyclical outlook remains challenging, improving terms of trade and a structural capex pipeline spanning energy transition, defense, resources, housing, data centers, and Olympics infrastructure should provide medium-term support. Key risks include escalating energy disruptions and potential rate hikes.