Growth, inflation and labour market all easing
The July NAB Monthly Business Survey showed a continuation of the strong run enjoyed by the business sector. Business conditions rose to their highest level since early 2008, while confidence also strengthened.
Global: After a disappointing first quarter, the pace of global upturn picked up in the June quarter as preliminary GDP results for China, the US and the Euro-zone – which collectively account for 45% of the world economy – showed faster growth. A combination of favourable financial conditions, still-stimulatory monetary policy and no head-winds from budget austerity have underpinned the ongoing moderate growth in the big advanced economies. Conditions in the emerging economies have been more mixed with solid growth in China and India whereas Russia and Brazil have experienced tough economic times. We expect global growth to rise from 3.2% in 2016 to 3.4% this year and an around-trend 3.5% in 2018. China and India remain the stand-out global performers, accounting for around half of global growth between them, with a promising looking upturn in the Euro-zone and growth of around 2% in the US driving much of the rest of global expansion.
Australia: The aggregate outlook for the Australian economy remains somewhat bland, despite solid activity in non-mining sectors outside of retail. While there will be some oscillation in the through-the-year growth rate as LNG exports and dwelling construction ramps up (in H2 2017) and then taper off over the course of 2018, the broad thrust remains for annual average growth to remain between 2½% – 2¾% until 2019. Our early estimate of GDP in Q2 is for growth of 0.6% q/q (1.6% y/y), with even stronger rates expected for Q3 and Q4 as LNG exports ramp up further. We have revised up our employment forecasts in the near-term based on strength in partial indicators (such as NAB Survey employment), which will see some downward pressure on the unemployment rate through the remainder of 2017. Employment growth then eases a little through 2018, as economic growth loses momentum. Despite the RBA’s discussion of the neutral cash rate, there is no urgency in starting to return to neutral (the point at which monetary policy is neither expansionary or contractionary). Spare capacity in both the economy and the labour market provides lots of time for the RBA to remain in ”watch and see” mode. We continue to expect no change to the cash rate until 2019, with some risk of an earlier hike if current strength in employment is sustained.
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