Key Points:

• The Chinese share market correction and concerns that Greece could exit from the Euro-zone have raised both financial market volatility and the downside risks to (already sub-trend) global growth. Unlike the IMF, we are not expecting much of an acceleration in the pace of global growth through the next few years and recent partials do not provide any evidence of this either. Soft economic outcomes across much of East Asia and Latin America, the trend slowing in China and the lack of growth momentum seen in recent Indian data are weighing on global growth, as these economies have been the main drivers of output increases in recent years. We have not changed our forecast for global growth this year (3.2%), but a softer outlook for Japan & India prompted a slight downward revision for 2016 and 2017.

• We have not changed our activity forecasts – 2014/15 2.4%, 2015/16 2.6% and 3.0% in 2016/17. The big picture is still one where the domestic economy is struggling to offset the impact of sharply lower mining investment. However near term data has continued to strengthen. Lower interest rates and the AUD (which we have lowered marginally), strong housing prices (especially in NSW and Victoria) and a post Budget kick in confidence appears to have driven better business outcomes. Against that consumers remain cautious and business remain reluctant to hire. It also appears they are demanding high rates of return – above 13% – before investing. It is difficult to assess the impact of recent international events such as Greece and more importantly China – especially equity market volatility and further falls in commodity prices. Given its better start point we now expect a lower peak in unemployment of 6¼ – but remaining high for a considerable period. We still see the RBA as having finished cutting – the market priced cut depends on downside surprises to our forecasts. We see the next move in rates as up – but not till late 2016 (and with a lower end point for the Official Cash rate of 3.5%). And it is worth noting that while the international volatility create risks to the downside on the forecasts, local data is pointing to upside risks.

For more details, please refer to the attached document.

• Australia & the World on two pages – July 2015 (PDF, 622KB)