Global

COVID-19 remains the most significant risk to our global outlook. Much of the emerging world remains vulnerable to the pandemic due to low vaccination rates and this is unlikely to be resolved before late 2022 at the earliest. There is growing concern that newer COVID-19 variants are more easily transmitted – potentially requiring higher than previously thought rates of vaccination to achieve herd immunity. Financial conditions indices remain accommodative reflecting stimulatory policy settings. Despite current inflationary pressures, we expect major central banks to keep policy rates low for now, with initial adjustments to policy settings to be in the form of asset purchase tapering. Relatively strong global business survey readings are skewed towards the opening-up advanced economies. In contrast, surveys for EMs have softened.

Australia

The current virus outbreak in NSW and associated lockdowns/border closures highlights the significant uncertainty around economic forecasting at present. We have made a modest tweak to our forecasts for GDP based on current developments but there is some downside risk depending on the ultimate duration of the Sydney (already extended since the forecasts were prepared) and Victorian lockdowns. At this stage we do not see the recovery as having been derailed, given the significant momentum heading into the current disruptions. We see GDP growth of 5.0% in 2021, 2.5% in 2022 and 2.2% in 2023. The unemployment rate is forecast to continue declining but we don’t expect it to reach a level consistent with full employment (a rate in the low 4’s) until towards the end of 2023. Nonetheless, we do expect wage growth to pick-up from here – tracking by around 3% at end 2023. Following the RBA meeting last week, we have affirmed our view that the cash rate will remain on hold until early 2024, although there is a risk it could come sooner (end 2023) if there are further upward surprises to activity and the labour market, or the RBA reverts to being forward-looking. On QE we expect the RBA to continue to taper gradually with total purchases after September of around $100bn.

Find out more in NAB’s World on two pages July 2021