Growth, inflation and labour market all easing
The bigger picture – A Global and Australian economic perspective
Global: Despite signs of stabilisation in areas of the world where economic activity has been weak, there is little evidence of new growth engines appearing that could pull economic growth out of the doldrums. Consequently, we do not expect much improvement in global growth from the sub-trend 2¾% recorded since late 2015. Sub-trend growth and below target inflation means that central banks are under little pressure to lift their policy interest rates off historically low levels. The Fed should continue its ultra-cautious tightening with a rate hike in December but in the UK, Japan and Euro-zone the odds are skewed more to monetary loosening than interest rate increases. While global growth has been disappointingly sluggish, output expansion has continued through numerous shocks – Brexit, 2015’s Chinese currency and share market volatility and the early 2016 growth concerns to name just three.
Australia: The Australian economy grew at a year-ended rate of 3.3% in Q2, the fastest pace since mid-2012, thanks to a surge in government spending. Going forward, real GDP growth is expected to ease, most clearly in 2018 after the dwelling cycle has turned and resource exports no longer contribute to growth. Our forecasts are for real GDP growth of 3.0% on average in 2016, followed by 2.8% in 2017 and 2.6% in 2018. The unemployment rate is expected to hold steady through the forecast horizon at around 5.6-5.7%, a rate which indicates ongoing spare capacity in the labour market. There is some downside risk to our near-term forecasts given the recent loss of momentum in indicators of household spending in particular, but also business conditions. These bear close watching. The RBA will hold steady in the near-term, but two cuts are likely to follow in mid-2017 as low inflation persists.
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