NAB’s World on Two Pages: August 2019

The latest escalation in the US-China trade war has reverberated through financial markets. The policy response will be important – we now expect two further 25bp cuts in the fed funds rate this year. China is also likely to use policy measures to offset any tariff impact, including allowing further depreciation of its currency.

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Global

The latest escalation in the US-China trade war has reverberated through financial markets. The policy response will be important – we now expect two further 25bp cuts in the fed funds rate this year. China is also likely to use policy measures to offset any tariff impact, including allowing further depreciation of its currency. The pick-up in Advanced Economy (AE) growth in Q1 was not sustained in Q2, and we expect AE growth to slow further in H2 2019 before stabilising in 2020. Trade exposed Emerging Markets are struggling, with exports from East Asia falling significantly. We have lowered our 2019 global growth forecast to 3.1% (from 3.2%) but our forecasts for 2020 (3.3%) and 2021 (3.5%) are unchanged. Trade policy remains a key risk and there are also other geo-political risks.

Australia

We have fine-tuned our forecasts for growth in Q2 (now see 0.4 to 0.5% q/q) but largely expect a similar pattern of growth further out to previous forecasts. We see growth of 1.6% this year, before a small improvement to around 2¼% on a year-average basis in each of the out years. The unemployment rate is expected to lift slightly (reaching 5.5%), with employment growth slowing on the back of sub-trend growth. The key dynamic behind this slower growth is a weaker household sector with modest consumption growth (weak wage growth being a key headwind) and ongoing falls in dwelling investment. The public sector and net exports are likely to show some strength, offsetting some of this weakness. We also anticipate a solid performance from the business sector, with private investment likely to rise in aggregate on the back of growth in the non-mining sector, while mining should at least stabilise. However, a weak starting point, with low inflation and sizable spare capacity in the labour market are likely to see the RBA cut the cash rate further (indeed, their own forecasts embody a further 50bps of cuts). We see a November cut as probable but think there is significant risk of further cuts, and would not rule out unconventional policy should the economy not receive substantial support from other policy arms or global headwinds worsen.

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