Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.
Global & Australian Forecasts – April 2016
The forces shaping the economic outlook are broadly unchanged.
- Global share markets have regained much of their early 2016 losses, financial market volatility has subsided and both commodity prices and the Chinese currency have stabilised – helping to reduce the risk of a renewed downturn in global economic activity. However the backdrop to these market movements remains one of very sluggish sub-trend growth, inflation that is below target in major economies, difficulty in increasing revenue as margins are sacrificed to win modest volume gains, slow wage growth cramping spending increases, high levels of debt and central banks that have used up much of their policy ammunition. Despite the many risks, we still think global growth will muddle through 2016 at around the 3% rate seen last year but it could be a bumpy ride with plenty of further scope for volatility, reflecting the numerous triggers for further bouts of market jitters.
- In Australia, recent business survey outcomes suggest the recovery across the non-mining economy is on track or indeed gathering speed. While the downturn in mining regions (especially WA) is becoming more pronounced and the global backdrop remains challenging, activity appears to be broadening across non-mining sectors and states. Overall, our real GDP forecasts are broadly unchanged at 2.7% in 2016 and 3.0% in 2017, before easing to 2.5% in 2018 as the large contribution from net exports dissipates. The unemployment rate is forecast to fall to 5.6% by end-16, ease a touch further to 5.5% by end-17 before ticking up in 2018. While recent AUD appreciation presents a downside risk to economic activity, we doubt whether this move higher will be sustained and expect the downward trend to resume as the year progresses. Meanwhile, we retain our view that the RBA will remain on hold through 2016, although this will depend on the path of the currency, inflation and whether the labour market continues to improve as anticipated. Lower than target inflation in conjunction with an AUD above 80 US cents and any evidence of a faltering non-mining recovery would quickly see further rate cut(s).
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