Below trend growth to continue
In February, the NAB Monthly Business Survey moderated from the surprising strength seen in January, but remained consistent with a relatively robust view of business activity and investment behaviour in the near-term.
Global: The cyclical upturn in the global economy has continued. Business surveys and hard data on industrial output and world trade show growth ramping up, and we expect the pace of global expansion to lift back to around its trend pace by 2018 – the fastest since 2012. Although central banks have done all they are likely to do to stimulate this upturn, they should proceed cautiously with any policy tightening. Meanwhile, fiscal agencies that have previously emphasised the need for austerity now seem unlikely to lift taxes or cut spending. Uncertainty over the political complexion of governments has also risen, along with the chance that incoming administrations could opt for radically different economic policies. It is still unclear what approach the Trump administration will take on a range of important tax and trade issues, the UK Government has to manage the Brexit process and a series of general elections looms in the Eurozone where some high polling populist parties advocate major changes in policy. Our forecast is based on these political risks not de-railing the cyclical upturn in global growth.
Australia: Real GDP rebounded in Q4 2016 as expected, while sharply higher commodity prices drove a strong bounce in the terms of trade and profits – although labour income remains weak. Leading indicators suggest strong real GDP growth through most of 2017 (we expect growth of around 3%), but we are not as relaxed about the outlook in 2018 as contributions from LNG exports, temporarily higher commodity prices and residential construction fade – while household consumption remains constrained by weak wages growth. Through 2018 we expect growth to be only a touch above 2%. The RBA’s increased focused on financial stability considerations suggest they are reluctant to cut rates further, while recent comments from RBA officials raise the possibility that macro-prudential measures will be stepped up. Consequently, we removed our expectation for a 25bp rate cut in late 2017, although there is a risk of more easing down the road given our concerns about the longer-term outlook.
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