Global & Australian Forecasts – January 2013

Global economy sluggish in late 2012 but signs of an upturn, that gathers pace through next two years. Financial markets strengthen reflecting “risk on” as confidence in global outlook strengthens in wake of central bank action. Emerging market economies will still drive global growth.

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Global economy still sluggish in late 2012 but early signs of an upturn that gathers pace through next two years. Financial markets strengthen reflecting “risk on” as confidence in global outlook strengthens in wake of central bank action. Emerging market economies will still drive global growth. Australian economy to keep weakening in early 2013. Low CPI shifts balance of risks towards Feb rate cut while rising unemployment likely see more cuts (possibly May & August).

  • Financial markets have lifted as confidence in the global growth outlook has firmed but late 2012 data for world exports and industrial output remained soft, showing modest expansion in activity at best. Central bank action in the Euro-zone, US and Japan has boosted market hopes of sustained growth by removing tail risks like a Euro-zone break-up or premature US interest rate rises.  While the forecast global upturn is initially modest as activity is held back by weak conditions in Western Europe and Japan, things look brighter for 2014 with global growth predicted to finally rise above trend. The emerging market economies are still driving most global output expansion through the forecast period, but a broad-based albeit fairly modest upturn should start later this year across the developed economies.
  • The run of data over summer confirmed the current softness of the Australian economy with leading indicators suggesting the first half of 2013 will be a difficult period.  While business confidence jumped in December – as per international confidence – domestic conditions remain deeply negative. Near-term outlook very soft – GDP forecasts 2.0% in 2013 and 3.3% in 2014 (unchanged from our rate note of 11 January). Softer local demand will see unemployment rise to 5¾% by mid-2013. Unemployment could approach 6% in late 2014 as the mining boom transitions from the construction phase to exports phase.
  • CPI inflation surprisingly low for Q4 2012. We see core inflation (inc. carbon) still near the middle of the RBA target by late 2013 (2.6% in the year to Q4 2013). Inflation could however move higher in late 2014 as the AUD weakens and interest rates remain very low (2.8% through 2014). Given the downward demand and price pressures business now face the balance of risks has shifted towards an RBA rate reduction in February (rather than March). But with unemployment rising to 5¾% by mid-2013, we still see the need for two additional 25 bp rate cuts – possibly in May and August, taking the cash rate to 2.25%.

For further analysis download the full report.

Global & Australian Forecasts – January 2013 (PDF 426KB)