Key Points:

• Despite the ups and downs of global financial markets in the first five months of the year, the underlying picture remains one of steady sub-trend growth and sub-target inflation. Neither the business surveys nor the monthly partial data on industrial output and exports show evidence of an imminent acceleration in growth but the rise in commodity markets off their recent lows and the wealth effects of higher share prices could support activity later this year. Despite the many risks, we still think global growth will muddle through 2016 at around the 3% rate seen last year but there are plenty of economic vulnerabilities that could spark further rounds of market volatility.

• In Australia, real GDP growth picked up to 3.1% y/y in Q1 and is expected to remain at around the 3% mark for the remainder of 2016 and 2017 before easing back to 2½% in 2018. While net exports are providing the largest contribution to growth (1.1ppt in Q1 alone) in real terms, our estimates also suggest non-mining activity is outperforming the aggregate economy. The ongoing above-average level of business conditions is also consistent with the rotation towards non-mining industries and states (with non mining GDP now growing at a rate around 3¾%). The unemployment rate is forecast to fall to around 5½% by late 2016 before ticking up to around 5¾% in 2018. Meanwhile, the weaker terms of trade and low wages growth will continue to challenge national income and government revenue. Low inflation will remain a feature (despite some early evidence of stronger price pressures in this month’s business survey) but we are not persuaded at this stage that further monetary policy easing will be forthcoming. A cut would first require another very low core CPI reading, a sharply higher AUD (to say above 80c USD) and/or signs of weakness in the non mining economy.

See the full report for details:

• Global & Australian Forecasts – June 2016 (PDF, 2MB)

Also available:

• Monthly Business Survey – May 2016 (PDF, 170kb)