Global & Australian Forecasts – November 2012

Global growth still sluggish with major divergences between different regions. Below trend growth expected to continue into 2013 as world economy averts major risks in US and Euro-zone. Australian economy stumbles into Q4, with growth clearly below trend.

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Global growth still sluggish with major divergences between different regions. Below trend growth expected to continue into 2013 as world economy averts major risks in US and Euro-zone. Australian economy stumbles into Q4, with growth clearly below trend. Slowing mining boom, still high AUD and fiscal tightening to weigh on near-term activity. GDP forecasts unchanged, but softer than RBA and Commonwealth. One more RBA cut in February provided modest CPI and still soft demand.

  • Central banks in the advanced economies continue to provide policy stimulus to promote growth and their counterparts in the emerging economies have shifted from tightening to easing monetary policy. Nevertheless, the pace of global growth remains slow with the big emerging markets and the US driving most of the world’s output expansion. Central bank actions have averted the worst risks overhanging the global economy but weak private sector demand and either planned or adopted programmes of fiscal austerity have weighed on growth. Although the emerging market economies have fared much better than advanced economies, the softening in growth has been broadly-based with large parts of Latin America and Asia slowing markedly. Output now seems to be falling in key Euro-zone export markets and the Japanese economy has hit a new series of problems.
  • The Australian economy appears to have stumbled into Q4; business conditions fell further in October, recording their weakest level since May 2009, while forward indicators remain subdued. We have left our growth outlook unchanged this month; GDP forecasts 2.3% in 2012-13 (below the Commonwealth Treasury and RBA’s 3%) and 3.0% in 2013-14 (in line with Treasury’s 3% and RBA’s 2¼-3¼%). Weighing on near-term activity will be slowing mining investment, a still high AUD, fiscal tightening and ongoing weak global economy. In the medium term, while increased exports are likely to partly offset impact of falling mining investment on GDP, solid economic growth outcomes will require non-mining sector demand to strengthen. Labour market expected to weaken due to restructuring burden.
  • With domestic activity weak, the path for inflation remains soft – notwithstanding the impact of carbon pricing on headline CPI in Q3 2012. NAB survey highlights downward price pressures facing businesses, with continuing retail discounting and a still high AUD likely to keep core inflation (inc. carbon) contained – 2.9% in 2012-13 (RBA 2¾%) and 3.0% in 2013-14 (RBA 2-3%). While CPI outlook is creeping towards the upper end of the RBA’s target range, we still favour one more rate cut; 25 bps in February to assist weakness in near-term demand, though this will require a moderate Q4 CPI outcome, further weakness in domestic demand indicators and an ongoing weak global outlook. After that, the risk of further cuts will remain for much of 2013.

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