Global economy still sluggish in late 2012 but equities strengthen on stronger risk appetite and expectations of sustained global recovery. Partial data suggest better start to 2013; we still see marginally better growth in major advanced economies this year, accelerating in 2014. Australian outlook a little stronger reflecting history: GDP growth to be 2.3% in 2013 (was 2.0%) and 3.1% in 2014 (was 3.3%). Expect two rate cuts in 2013 (was 3) possibly June & Nov as labour market weakens and restructures.

• Financial markets have lifted as confidence in the global growth outlook has firmed but late 2012 data for world exports and industrial output remained soft, showing modest expansion in activity at best. GDP fell at the end of last year in Western Europe and Japan, was flat in the USA, while the pace of growth in some of the biggest emerging market economies was sluggish by their standards. Business surveys suggest that conditions are expected to improve in several of the most important advanced and emerging economies (notably the US,Germany,Brazil and India). We expect growth to increase modestly this year, held back by ongoing weakness in the Euro-zone, followed by a more size-able acceleration in 2014.
• While there are some signs of improvement in the Australian economy, including from the latest national accounts, the outlook is still subdued. A high AUD, declining terms of trade and a large structural adjustment task remain headwinds. The latest NAB survey points to continuing weakness in conditions, confidence and forward orders.
• Given the Q4 GDP outcome and upward revision to Q3, we have marginally strengthened our forecast for 2013, with growth expected to be 2.3% (was 2.0%) and unemployment rising to around 5¾% by late 2013 (unchanged). For 2013/14, that implies GDP growth of 2.6% (was 2.8%) and 3.1% in 2014 (was 3.3%).
• We have revised our cash rate expectations. RBA now expected to cut by 50 bps in 2013 (possibly June & Nov). This reflects RBA’s “comfort” with current activity, signs previous cuts have gained traction in housing markets & retailing, and “so far” resilient labour market. But with weak underlying demand continuing, we still see unemployment rising to 5.7% by mid year, with little sign that non-mining investment will ramp up.

For further analysis download the full report.

• Global & Australian Forecasts – March 2013 (PDF 405KB)