The World on two pages – December 2014

Global growth remained around 3% yoy in Q3, sightly below trend but it is expected to pick-up to 3½% in 2015 and 2016. Major differences in the strength of economic activity persist between regions with the US, India and China accounting for almost 2 ppts of forecast global growth.

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Global: Global growth remained around 3% yoy in Q3, sightly below trend but it is expected to pick-up to 3½% in 2015 and 2016. Major differences in the strength of economic activity persist between regions with the US, India and China accounting for almost 2 ppts of forecast global growth. Headwinds to growth are coming from another group of big economies including the Euro-zone, Japan, Russia and Brazil. We are revising down our oil price forecast which should help boost global growth. Much depends on the cause (supply vs demand) and duration of the oil shock. OECD models show a sustained $20 drop in oil prices adds 0.4 ppts to OECD growth over 2 years but temporary shocks have less impact. Lower oil prices boost activity in India but dampen growth in the many energy exporting economies.

Australia: Softer commodity prices in October are expected to persist and subtract over $25b from export earnings in 2014/15 compared with our previous forecasts. Business conditions softened in November but are largely in line with long-run averages. The employment outlook remains soft and business confidence retreated – indeed the latter is increasingly concerning. GDP growth in Q3 of 0.3% was below expectations and probably overstates the real position, but continues to point to soft (possibly even declining) demand. There are increasing risks that the mining cliff, while deferred, may turn out steeper. We have changed our view on the cash rate and now expect two of 25 bp cuts in March and August 2015 then remaining on hold until late 2016. Exchange rate forecasts to track US3 cents lower than previously expected. GDP forecasts cut reflecting weaker history and terms of trade: 2014/15 2.5% (was 2.9%); 2015/16 3.0% (was 3.2%). Unemployment rate now to peak at around 6¾% (was 6½%).

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