Below trend growth to continue
The Bigger Picture – A Global and Australian Economic Perspective – December 2018
Global growth slowed noticeably in 2018 Q3 following four quarters of fairly stable growth. Emerging markets were the main driver of this slowdown, led by India and East Asia (excluding China). Growth in the advanced economies is expected to converge somewhat in Q4, reflecting moderating growth in the US and an improvement in Japan and the Euro-zone. Short term prospects are less encouraging in emerging markets, given trade and industrial trends, particularly in countries such as Indonesia and Brazil. Recent financial market turbulence has also added to doubts around the global monetary policy outlook. Our forecasts for global economic growth are unchanged – increasing by 3.7% in 2018 before slowing to 3.6% in 2019 and 3.5% in 2020 (the long term trend rate of growth), but risks are on the downside. This slowdown should largely occur in the advanced economies, as US fiscal stimulus fades, monetary policy continues to tighten and supply side constraints become more binding.
We have delayed the expected timing of our first expected hike by the RBA to H2 2020. For some time we have noted our expectation of the first rise occurring in mid-2019 was highly data dependent. Growth has generally been as expected, though wages growth and the build-up in inflationary pressure has not. The RBA also appears very patient and will wait for hard evidence of inflation returning to the target band on a sustainable basis. In addition, we have lowered our forecast for house prices; though still see the correction occurring in an orderly fashion. With further falls in house prices now factored in, we have incorporated a larger fall in dwelling investment and some additional spill-overs into weaker consumption. Consequently our GDP and inflation forecasts have been lowered a little – we see GDP growth of 2.9% in 2018 before slowing to 2.4% in 2019 and 2.3% in 2020. It is important to note however, that we still see a robust rate of economic growth, with activity supported by strong growth in government spending, exports and growth in non-mining business investment. Our monthly business survey confirms that business conditions remain well above average, despite having eased through 2018. Further, mapping survey responses to employment growth suggests ongoing growth of over 20k per month, which would still be enough to see the unemployment rate decline further (we expect unemployment to decline to 4.7% or so over the next year). As a result, we expect wage growth to lift gradually and for inflationary pressure to continue to build.
For more details, please refer to the attached document.
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