A monthly snapshot of NAB’s global and domestic economic outlook.

The Bigger Picture – A Global & Australian Economic Perspective

Global: The global economy is experiencing a broad-based slowdown with both the advanced and emerging economies reporting a softening in growth. Conditions vary between regions with recession in Western Europe, slowdowns in China, India and Brazil and only modest growth in the US. We have marginally lowered our Chinese outlook to 7½% as near-term weakness continues – albeit with more stimulus signalled. Market hopes for US monetary easing and the announcement of ECB sovereign bond buying have seen risk appetites recover. Monetary policy easing in the US and big emerging market economies as well as the passing of the Euro-zone recession imply a pick-up in global growth from 3% this year to 3.4% in 2013.

• Global financial markets remain focussed on the chances for policy action by central banks across the US, Euro-zone and China. The Fed Chairman’s recent comments that the economic situation is “obviously far from satisfactory” and that they might have expected to see greater progress by now toward higher employment, have been read as boosting the chances for more monetary easing, probably involving QE3. At the same time the ECB is getting ready to restart its bond buying, which together with the Fed’s comments, have supported equity markets – with the latter rising by around 5% from its July trough.
• The CPB’s monthly estimate of global industrial output and trade – a timely measure of the pulse of economic expansion – shows that the 3-month trend in global industrial output has virtually levelled off since February, after growing rapidly until early 2012. It was flat in the June quarter after growing by 1¾% in the first quarter with a modest ¼% decline in output in the advanced economies alongside a big slowdown in the emerging markets. The volume of world trade has continued to grow but the pace of growth has eased from ¾% in the March quarter to ¼% in the June quarter. The broad-based softening in the pace of economic expansion is being reflected in a moderation in inflationary pressure in many countries.
• Many economies remain mired in a combination of private sector de-leveraging and actual or planned fiscal austerity measures. As a result, the impetus of expansion has faded with parts of Europe falling into a double-dip recession while a previously solid looking US upturn has slowed. Economic growth at recent rates is not enough to substantially lower the high US unemployment rate. The US business surveys are pointing to continued weakness. The latest round of purchasing managers indices for manufacturing in the main advanced economies proved uniformly soft, although the service industry readings were more buoyant.
• The big emerging economies will continue to drive much of the global economy’s growth, contributing almost 1¾% points of the 3% global growth this year. Nevertheless, the pace of expansion has slipped this year across each of the biggest emerging economies. Brazil has been the worst affected, its growth slipping to ½% yoy in the June quarter while Indian growth slowed to around 5½% yoy. Chinese growth has been slowing as the downturn in its export markets and problems in the construction sector weigh on activity in a range of industries. The markets are waiting to see if the authorities take more decisive action to the softer conditions.
• The slowing in activity has also been marked outside the biggest emerging markets. The very trade-dependant economies of East Asia have seen a sharp slowing in exports and industrial output growth. Indonesia, with its closed economy heavily reliant on domestic rather than external demand, is the exception and activity in Thailand has been boosted by the recovery from last year’s floods. The softening in Latin America extends beyond Brazil with a region-wide downturn in exports and industrial output growth.
• While there are plenty of downside risks to the outlook and the latest business surveys are not pointing to an imminent upturn, we think that conditions will improve next year and growth will accelerate from 3% to just below 3½%. Monetary policy either has or is expected to be loosened again in the US, China and Euro-zone. The worst risks to the global economy should be averted – the ECB’s bond buying program has signalled that it is not prepared to let the Euro-zone break-up, the Chinese authorities will not let the economy experience a hard landing and the “fiscal cliff” in the US would have such severe consequences, that even US politicians are unlikely to allow this to happen.

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• The Bigger Picture – A Global & Australian Economic Perspective (PDF 77KB)