NAB’s World on Two Pages: June 2019

The Bigger Picture – A Global and Australian Economic Perspective – May 2019.

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Global

In our view the global outlook has deteriorated. Financial markets hit a pothole in May following an escalation of the US-China trade dispute and the short-lived US threat to raise tariffs on imports from Mexico. More dovish expectations around central bank policy have helped support markets; we now expect that the US Fed will cut rates (by 50bps) over the second half of 2019.

The latest data confirm that major AE growth strengthened in Q1 but this is unlikely to be sustained over the rest of the year. Emerging market economies are more trade exposed than the AEs and therefore the increase in trade tensions are a negative for them. We have again lowered our global growth forecasts – to 3.2% in 2019 (from 3.3%) and to 3.3% in 2020 (from 3.4%) as we expect that last month’s trade disputes will negatively affect business sentiment and investment.

The forecast revision is also consistent with the message coming from our leading indicator of global activity.

Australia

The Q1 national accounts confirmed a third weak quarter of growth. Again, the household sector continued to weigh with further slowing in household consumption growth and another substantial decline in dwelling investment. Net exports and public spending offset some of this weakness, while business made a small contribution. Mining investment continued to decline in the quarter while investment in the non-mining sector rose. Looking forward, we have not materially changed our forecasts for 2020 and 2021, for which we see growth of 2¼% – well below trend and restrained by ongoing weakness in the household sector.

In the near-term we have downgraded our forecasts, incorporating the weak outcome for Q1 and a softer expectation for Q2 mostly a result of weakness in consumption. Overall, we see through the year growth falling to 1.3% in Q2 and year-average growth in 2019 of 1.7%.

Consequently, we see a weaker labour market, with slowing employment growth and an upturn in the unemployment rate – reaching 5.5% by the end of 2021. As a result, wages growth can be expected to remain weak and inflation is now only expected to return to the bottom of the RBA’s target band by end-2021.

We still see a rate cut in August but would not be surprised by a move in July. In addition, we now see a second cut in the second half of this year, and while heavily data dependent we have pencilled this in for November. We also think additional fiscal policy action will be required to provide a boost to the economy and some risk that should further stimulus be required, that the RBA will turn to a combination of alternative policy tools in early 2020.

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