Key Points:

• Global growth remains sluggish and below trend and we have slightly lowered our forecasts to take account of weaker than expected outcomes in India, Canada and Brazil. The pace of growth in the big advanced economies has picked up, mainly reflecting a US recovery from weak first quarter growth. In contrast, Japan and the Euro-zone are not growing strongly and Canada is in recession. Emerging market economies drive most global growth and they are slowing – with falling world trade volumes and softer commodity prices eroding incomes, spending and output across much of East Asia, Latin America and S Africa. The bursting of the Chinese share market bubble and the authorities’ confusing response adds further unwelcome volatility and uncertainty to an already uninspiring outlook and we expect growth to remain soft and below trend through the next two years with no sign of any imminent upturn in activity and sizeable downside risks. Continued downward pressure on commodity markets is to be expected, given this outlook.

• Q2 GDP showed the Australian economy growing at just 2% y/y as it struggles to transition to non-mining sources of growth amidst lower national income. Against that, there is increasing evidence that growth momentum is broadening across the non-mining economy – not limited to the dwelling sector – in response to the lower AUD and interest rates. Improvement is particularly evident in services sectors in both the NAB survey and the official national accounts. Due to the lower base, our 2015/16 GDP forecast is now 2.4% while the 2016/17 forecast is unchanged at 3.1%. The unemployment rate eases to 6% through 2015/16 and to 5¾ in 2016/17. While risks to the outlook stemming from financial market volatility and a slower China are front of mind, at this stage they are balanced by stronger local momentum in the non mining sector. There is little case on purely domestic grounds for easier monetary policy, with areas of economic weakness unlikely to respond to lower rates, although external risks suggest the RBA will retain an easing bias for some time.

For further details, please see the attached documents.

Global & Australian Forecasts – August 2015 (PDF, 658KB)