Growth, inflation and labour market all easing
The bigger picture, a global and Australian economic perspective.
While global growth remains above average, GDP data for Q3 point to a slowdown in the second half of 2018. Business surveys also indicate a slowdown is underway, particularly in manufacturing. The divergence in growth rates between the major economies that emerged in the first half of 2018 has carried over into Q3 – the US economy posted another strong result, while Euro-zone growth slowed noticeably and Japan’s economy went backwards (partly reflecting temporary factors). Growth in the major emerging market economies also likely slowed in the quarter. Financial market volatility has also lifted with large falls in equity markets. We expect above average global growth in 2018 at 3.7%, slowing to 3.6% in 2019 and 3.5% in 2020 (the long-term historical average). This expected slowdown is driven by advanced economies as US fiscal stimulus fades, monetary policy tightens and supply constraints bite. The US-China trade dispute is a potential headwind to growth; especially if there is further escalation.
We have not changed our assessment of the underlying trends in the Australian economy. Following the strong growth of early 2018 we expect economic growth to slow a little over the next two years. However, we think the strength in the economy will still be enough to see the labour market hold onto recent gains, and for the unemployment rate to decline further from the 5.0% reached in September/October – a 6-year low. Recent data have largely confirmed that spare capacity is falling and that wage growth is beginning to moderately lift. As has been the case for some time, we expect the inflationary impacts of this erosion in spare capacity to emerge only gradually. Indeed, the Q3 CPI confirms we are starting from a below target position at around 1¾% on the core measures. With these trends heading in the right direction, we have left our call on the first move in interest rates unchanged but remain firmly of the view that this is highly data dependent. Even with robust growth, the labour market tightening and evidence of a modest pickup in wage growth, the RBA will want to see firm evidence of higher wages growth feeding through to inflation before adjusting rates.
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