NAB’s World on Two Pages: July 2017

Revisions to real GDP growth forecasts this month largely reflect a stronger than expected rebound in coal exports following disruptions from Cyclone Debbie in Q1. Further out, we have not fundamentally changed the tone of our outlook.

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The Bigger Picture – A Global and Australian Economic Perspective

Global: The global economic upturn continues, despite some disappointing output data from the big advanced economies in early 2017. The business surveys and the timely monthly updates on industrial output and world trade show expansion continuing at a moderate pace. Inflation remains below central bank targets in several key advanced economies and price pressures coming through the pipeline from commodities and manufacturing are waning. Despite ongoing low inflation, the growing evidence that advanced economy growth is being consolidated at a reasonable rate and the passing of earlier fears of price deflation is causing a policy rethink among several central banks. They seem to be reconsidering the need for such low interest rates and such extensive asset buying. We expect global growth to pick-up from the near 3% rate reached in 2016 to 3¼% this year and 3½% in 2018.

Australia: Revisions to real GDP growth forecasts this month largely reflect a stronger than expected rebound in coal exports following disruptions from Cyclone Debbie in Q1. Further out, we have not fundamentally changed the tone of our outlook. We still expect lacklustre growth in household consumption, and a moderate cyclical upturn in non-mining investment, while government investment will help to fill some of the void left by mining investment. Growth is forecast to rise from 2¼% in 2017 to around 2¾% in 2018 and 2019, however, this masks some of the volatility in the profile. The second half of 2017 will see real GDP growth further bolstered by a ramp up in LNG exports, but momentum will fade by end-2018 as LNG peaks and dwelling construction drags. For 2019, growth is forecast to lift again as non-mining investment and public spending strengthens. Given the lingering risks to the outlook, signs of moderation in the housing market, and a reluctance to see the AUD strengthen further, the RBA should be content with keeping interest rates on hold for an extended period (mid 2019). Recent data flows have however been more encouraging, and if maintained could raise the prospect of a change in the balance of risks.

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