NAB’s World on Two Pages – May 2022

We now expect the global economy to grow by around 3.4% in 2022 and 2023. For Australia, we continue to be optimistic on the economy expecting above-trend growth this year and ongoing strength in the labour market.

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Global

We now expect the global economy to grow by around 3.4% in 2022 and 2023 (down from 3.7% and 3.5% respectively). The key drivers of the weaker outlook in 2022 are the lower growth rates for China and the United States. For 2024, we see global growth slowing to 3.1% – well below the long run average of 3.5% – reflecting the lagged impacts of monetary tightening and of the large increase in energy prices. A broad range of risks have emerged in recent times. There remains considerable uncertainty around the duration and economic impact of the Russia-Ukraine conflict (with global food prices likely to be affected in coming months). Major central banks have flagged more rapid increases to policy rates than previously expected, which will act to slow growth with the risk of a policy mistake as central banks may need to push rates above “neutral” levels if high inflation persists. With several shocks hitting the global economy at once, the risk of a recession in a major economy is rising.

Australia

For Australia, we continue to be optimistic on the economy expecting above-trend growth this year and ongoing strength in the labour market. The key changes to our forecast this month include modest markups to both our inflation and cash rate profiles. GDP is still expected to grow by 3.4% this year, slowing to 2.1% over 2023 and then tracking around trend at 2.2% through 2024. Further gains in employment should see the unemployment rate fall below 4% in coming months, reaching a 3.5% low in Q3 and staying there for much of the next year, supporting a gradual pickup in wage growth. We now see slightly stronger inflation prints over the next two quarters, which sees underlying inflation reaching 4.6% y/y by Q3 before moderating over the out years – 4.5% y/y at end 2022, 2.9% y/y at end 2023 and 2.7% y/y by end 2024. We have also adjusted our cash rate profile to account for the slightly larger-than-expected initial rate rise delivered by the RBA in May (25bps rather than 15bps). We expect a series of further hikes over coming months which should see the cash rate target rise to 1.35% by the end of the year, before continuing to rise over 2023 and 2024 – reaching 2.6% by the end of our forecast period. Growing concerns over global growth, renewed lockdowns in China and considerable uncertainty over the normalisation of supply chains and commodity prices remain the major risks to our forecasts, but overall the domestic outlook is fairly positive.

Find out more in NAB’s World on two pages (May 2022)