As we enter 2016, NAB Economics’ core view is for lacklustre global growth at around 3¼%, despite some of the risks hanging over global markets abating. In Australia, a gradual recovery is anticipated with real GDP growth increasing modestly to 2¾% as momentum in non-mining activity gathers traction. This is despite the stronger headwinds to national income stemming from lower commodity prices, and a less beneficial mix of global growth for Australia as China and other key markets in Asia slow. For the forecast detail, please see our latest Global & Australian Forecasts.

As always, risks abound and our forecasts depend critically on the assumptions underpinning them. In this article, we identify 10 global and domestic themes which will have bearing on the economic and financial market outlook:

1.   Global monetary policy divergence – Higher US rates, while balance sheet expansion by the ECB and BoJ continues. The RBA will sit on its hands.

2.   A turning point for global inflation? Will 2016 be the year that deflationary pressures ease? Much will depend on commodity prices as well as the degree of spare capacity, wages and aggregate demand across the global economy.

3.   Global trade slowdown: cyclical or structural? Either way, global trade volumes and prices are likely to remain low as a share of global growth.

4.   Services activity holding the baton – a global and Australian story. Growth (including in the US, China and Australia) will be increasingly driven by services activity. Services industries are typically more labour intensive (which is good for employment), but less capital intensive and have lower productivity.

5.   Risk of China hard landing. While we anticipate a “soft-landing”, downside risks persist into 2016.

6.   Commodity prices – how low can they go? Risks appear tilted to the downside amidst stubborn oversupply and weak demand.

7.   AUD – overvaluation returns. In periods in which commodity price movements and the AUD have diverged, history suggests the AUD is the one to adjust. Expect further downward pressure into 2016.

8.   Non-mining investment – the missing ingredient? While business confidence is patchy and the outlook is lacklustre, the official capex survey may be presenting an overly pessimistic picture.

9.   Fading impetus from property? The long lead time between approvals and construction will still see dwelling investment contribute (somewhat) to growth. While property prices will not provide the same support to household spending, strong employment outcomes will provide some offset.

10. Changing the growth narrative: tax reform and the “innovation nation”. Australia’s next phase of growth will be defined by our ability to foster a culture of innovation and reform (with much of the focus in 2016 to be on taxation). This will be a key determinant of business confidence and important in generating the productivity growth necessary to offset the impact of weaker population growth and an ageing population profile.

For more information please refer to the attached report.

NAB Economic Commentary – 10 Themes for 2016 (PDF, 496KB)