Global economy slows with softening evident across advanced and emerging economies. Worst risks should be averted and global growth to pick-up slightly in 2013. Australian economy at trend but softening, while confidence helped by Euro-zone comments and lower interest rates. Labour market and orders still soft but activity to hold up sufficiently to circumvent need for further rate cut.

• 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. Market hopes for US monetary easing and ECB sovereign bond buying have seen equities rise and risk appetites recover. Monetary policy easing in big emerging market economies like China, India and Brazil and the passing of recession in the UK and Euro-zone should see growth pick-up from 3% this year to 3.4% in 2013.
• Australian economic outlook revised up: GDP forecasts 3.6% in 2012 (RBA 3¾%) but medium term down to 2.9% in 2013 (RBA 2¾-3¼%) (NAB survey implies 2¾% for Q3). Business confidence lifts on supportive comments out of Europe, the passing of carbon tax ‘hurdle’ and lower rates. Conditions weakened across a majority of industries, with particularly sharp declines in retail and wholesale – possibly reflecting unwinding of government compensation payments. Mining investment outlook remains strong despite softer commodity prices. Restructuring likely to maintain upward bias on unemployment in near term and keep consumers cautious.
• While activity is expected to moderate in coming months, reflecting the government’s fiscal consolidation and a slowing in consumption growth, a near term rate cut now appears unlikely. Underlying inflation at 2.4% in 2012 and 2.8% in 2013 (abstracting from carbon). While weaker than expected growth and higher unemployment could still force a rate cut by years end, on balance we see the RBA as more likely staying on hold until mid-2013. Thereafter, we see rates lifting a touch in the face of rising mining investment, a strengthening labour market and higher inflation.

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• Global & Australian Forecasts – August 2012 (PDF 404KB)