Growth, inflation and labour market all easing
Financial market volatility has eased since the US equity market correction in late January but a range of geo-political and market events could trigger another bout of uncertainty.
The Bigger Picture – A Global and Australian Economic Perspective – March 2018
Global: The global economic environment remains the most encouraging it has been for many years. Growth has broadened out across the advanced world, and some key emerging market economies have recovered from deep recessions. Financial market volatility has eased since the US equity market correction in late January but there are still a range of geo-political and market events that could emerge to again increase the level of uncertainty, with the risk of a trade war intensifying as President Trump has imposed tariffs on US steel and aluminium imports. If these risks remain in check, we expect that the current above trend growth can continue this year and next, as long as advanced economy central banks remain relatively cautious in tightening policy and governments place a low priority on budget repair.
Australia: Full-year economic growth in 2017 came in at a relatively subdued 2.3%. The good news story through 2017 was the long-awaited uplift in non-mining business investment, as well as a strong contribution from government infrastructure investment, although consumer spending disappointed and dwelling investment peaked. We see the economy gathering some speed through 2018, as business and government investment, as well as LNG exports contribute to growth. As a result, we see annual average growth of 2.8% in 2018, followed by 2.6% in 2019 and 2.8% in 2020. With growth running slightly above potential, spare capacity should gradually be eliminated, resulting in the unemployment rate tracking down and wages and inflation pressures gradually picking up. The RBA will not hike rates until there is comprehensive evidence that wages growth/inflation is moving in the right direction. At this stage, we have the first hike pencilled in for November 2018, with some risk that it occurs later.
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