Growth, inflation and labour market all easing
Last month’s spike in business conditions was completely unwound in the November NAB Monthly Business Survey, although the index remains at very elevated levels. Business confidence has been less volatile, but appears to be showing a modest downward trend.
Global: The global economic backdrop is now the best is has been for a number of years as the upturn continues and GDP growth rises to around trend. There are now welcome signs of a broadening in the expansion to include more investment spending and growth in old world sectors such as manufacturing. Market volatility and economic policy uncertainty are both lower as the probability of severe “tail risk” events are marked lower. Labour markets are tightening around big advanced economies but there is still little sign of a pick-up in wage inflation.
Australia: National Accounts data for Q3 2017 again highlighted the divergence between the business and household sectors in Australia. Economic growth should see a moderate improvement next year, to 2.9% in annual average terms (although momentum should slow as the year progresses), driving some further lowering of the unemployment rate to 5.2% by end-2018. Further employment gains will help to narrow the gap between business and households spending, although our forecasts for wages suggest only a glacial improvement in consumer spending, particularly if the softer housing market has an impact on wealth effects. Underlying inflation is forecast to pick up only slowly, which together with early evidence of higher wages growth should be enough to see the RBA commence tightening in H2 – we have 25bp hikes in August and November pencilled in. This would take the cash rate up to 2%, a level which is still considered stimulatory.
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