NAB’s World on Two Pages: October 2019

With growth having slowed in Q2 2019, there appears limited prospect of a turnaround in Q3 – given the relative weakness in business surveys, market expectations and the deteriorating global trade environment.

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Global

With growth having slowed in Q2 2019, there appears limited prospect of a turnaround in Q3 – given the relative weakness in business surveys, market expectations and the deteriorating global trade environment. The US has announced tariffs on European aerospace and a range of other imports, and threatened to extend tensions with China, moving beyond trade restrictions to financial flows. Global trade volumes have contracted, putting additional strain on manufacturers, with uncertainty around trade a major negative for business investment. Emerging market central banks have led an easing monetary policy, though advanced economies have also shifted. We expect the global economy to expand by a sub-trend 3.1% in 2019, with little improvement in 2020 (3.2%) before recovering to the long-term trend of 3.5% in 2021. Critical to the recovery in coming years is the lagged effects of softer monetary policy and cyclical recoveries in India and Latin America, while assuming no further escalation in trade or geopolitical tensions (which both present downside risk).

Australia

We have left our forecasts for growth, inflation and the labour market unchanged. We also continue to expect another 25bp cut in the cash rate to come in December, with the risk of further easing and potential move to unconventional policy in H1 2020 in the absence of a more significant fiscal stimulus or if conditions deteriorate from here. We expect recent trends of a weak consumer and a construction downturn, partially offset by export growth and high levels of public spending, to continue. Business investment remains a key dynamic, with mining investment expected to stabilise and infrastructure spill-overs to support growth in the non-mining sector. That said, weak consumption growth and heightened global uncertainty pose a risk to business investment. Overall, growth is expected to improve slightly from here, but to remain below trend over the next two years, despite low interest rates and some boost from tax cuts. Given our outlook for below-trend growth, we expect the labour market to deteriorate slightly, with unemployment edging higher – further constraining already weak wage growth. As a result, inflation is expected to remain weak, but gradually return to the bottom end of the RBA’s target. While, domestic factors have been a large driver of the need for policy support, global developments pose a significant risk should global growth slow further.

Find out more in World on two pages October 2019