US and European markets have begun the new week a subdued mood. But core global bond yields are showing some life, lower across the board while the USD is a tad softer too
The world on two pages: July 2016
The Brexit decision has provided yet another shock to global financial markets.
The Bigger Picture – A Global & Australian Economic Perspective
Global: Brexit, the latest in a series of shocks to global financial markets, leads up to shave our global growth forecasts by 10 to 20 bps in 2016 and 2017. Annual global growth should average around 3% over the forecast horizon, a lacklustre performance that falls well below its long run trend. China, India and the US remain key drivers of growth with softer conditions across Japan and the rest of E Asia, Latin America and W Europe. With little evidence of inflation pressures, central banks can keep interest rates very low by historical standards. The global trading environment for Australian business looks set to remain subdued, but the degree of global softness should be kept in perspective – this is a long flat period for growth as the global economy recovers from the GFC, it is not a recession.
Australia: Australian real GDP continues to be supported by solid non-mining activity and strong growth in the volume of LNG and services exports. Consistently above-average business conditions in non-mining appear to supporting business confidence (despite Brexit), which is encouraging as we enter a period of political uncertainty. The divergence between mining sectors and geographies is increasingly stark however, with low commodity prices to be an enduring feature. Our real GDP forecasts are 2.9% for both 2016 and 2017 and 2.5% in 2018. The unemployment rate eases to just above 5½% in coming quarters, before inching up. Meanwhile, low wages growth and weak commodity prices are consistent with a subdued inflation outlook and are a testing combination for government revenue, as evidenced by S&P placing Australia’s AAA credit rating on negative outlook. Our central case remains for the RBA to hold, although this is data dependant and the central bank is keeping its options open. Brexit will have minimal direct effect given Australia’s goods trade has re-oriented to Asia, although services trade and investment flows are larger.
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