Key Points:

• Global growth remains sluggish and below trend and, unlike the IMF, our forecasts do not envisage much pick-up in the next couple of years. Although the emerging economies are still growing much faster than the big advanced economies (around 5% versus around 2%), the focus of market attention has been shifting toward the former as falling commodity prices, the prospect of higher US interest rates, a build-up in debt and uncertainty over the pace of Chinese growth weigh on sentiment. By contrast, growth in the advanced economies picked up in mid-2015 and there is much less market focus on the problems with the Greek economy. Commodity exporting economies and their currencies have come under more pressure as sluggish global growth and the Chinese industrial slowdown lowers global commodity prices, impacting incomes and exports in some big primary producers which are heavily exposed to foreign investor sentiment.

• In Australia, the ongoing high level of business conditions and trend improvement in key leading indicators such as capacity utilisation supports our view that the gradual recovery in the non-mining economy is becoming more resilient (See latest Business Survey release). Low interest rates and the lower AUD are providing support, with strength particularly evident across services sectors of the economy, including but not limited to tourism-related activity. Our domestic forecasts are unchanged this month, with real GDP expected to expand by 2.4% in 2015/16 and 3.1% in 2016/17. The unemployment rate remains elevated for an extended period, but does ease to 6% by end 2015/16 and to 5¾ by end 2016/17, given the structural shift back towards more labour-intensive sectors. There remain clear downside risks from offshore, and weak commodity prices and falling mining investment will remain a drag. However, we find it difficult to mount a case for further policy easing on purely domestic grounds and view market pricing for another 25bp cut over the coming 6 months as overly pessimistic.

For further details, please see the attached documents.

Global & Australian Forecasts – October 2015 (PDF, 1MB)