Growth, inflation and labour market all easing
Business surveys and measures tracking the volume of activity suggest that the global economic upturn lifted a notch toward the end of last year and that trend seems to have continued into early 2017.
The Bigger Picture. A Global and Australian Economic Perspective
Global: Business surveys and measures tracking the volume of activity suggest that the global economic upturn lifted a notch toward the end of last year and that trend seems to have continued into early 2017. After years of worrying about sub-target inflation or deflation, there are finally a few signs that price pressures are returning, but only mildly. Having worked for years to generate this upturn, the authorities should be reluctant to nip it in the bud and avoid tough budgetary measures or premature monetary tightening. We expect a moderate upturn in global growth that takes it back to its long-term trend level by 2018. China and India are still big drivers of global growth but there is also an important forecast lift in the US as President Trump’s fiscal agenda is pursued. One big risk hanging over this predicted upturn is that political events and policy U-turns see markets turn risk averse and business confidence erode.
Australia: A recent upturn in partial indicators suggests economic activity is likely to be solid as we enter 2017. Real GDP in Q4 2016 is likely to print at a strong 0.9%q/q, following the 0.5% q/q contraction in Q3. Momentum is expected to remain solid through 2017, which will keep the RBA on the sidelines this year – we no longer expect mid-year rate cuts. We do however remain concerned about the economy’s trajectory in 2018, as the contribution from residential construction, LNG exports and temporarily higher commodity prices fade and household consumption remains constrained by weak labour income growth. We now expect a 25 basis point cut to the RBA’s cash rate in November 2017 to 1.25% – necessary to help prevent the unemployment rate from rising and underlying inflation from undershooting the bottom of the target in 2018.
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