Economic snapshot – June

| June 3, 2011

The weakness in the March quarter GDP creates a perfect storm for a central bank attempting to tighten interest rates in response to the underlying strength of the economy.

While the Reserve Bank is looking forward to emerging inflationary pressures, it’ll be difficult to avoid the tactical complications presented by the recent slowdown in our economy.

This is particularly the case in view of the ongoing softness of the retail and wholesale sectors, and a manufacturing industry weighed down by the strength of the dollar.

We believe that the next interest rate rise will most likely be deferred until July. A very poor GDP reading will make it more difficult for the Board to acquiesce in a rate rise, despite the enthusiasm of officials to pre-empt emerging inflationary pressures. Another rise is expected before the end of the year (perhaps September), with the cash rate still peaking at 5.25% by year end.

Currency outlook
Heightening RBA rate hike expectations should keep the AUD strong over the next six months. Given the Australian dollar is expected to remain buoyant, buying medical supplies online from overseas suppliers and hiring staff from overseas could be an opportunity worth exploring.

Property outlook
With tight rental supply and national house rent rises of 5.2 per cent forecast to March 2013, the market is ripe for those who have ready cash flow and are keen to purchase a well-valued investment property to build asset wealth separate from their healthcare business.

Both home sales and commercial property sales remain low for 2011 due to constricted access to credit, a rising Australian dollar, higher mortgage rates and the cessation of the First Home Buyers Grant.

These conditions mean those considering a property purchase can do so in a strong supply market. The RBA has kept interest rates on hold for the month of April and home prices are expected to increase modestly over the next year, according to NAB property research.

Australian outlook
Australian GDP growth was negative in the March quarter 2011, reflecting the adverse effects of the Queensland floods. However, we don’t see this result as changing our view on the fundamental strength of the Australian economy. Mining sector investment is set to rise massively, the reconstruction of Queensland will be supportive for another year or more, the terms of trade remain high and the labour market remains solid. Against that, consumption is likely to remain subdued over the coming couple of years.

Overall, we expect the economy to grow by around 2.25% in 2011, with growth accelerating in the second half of the year as the recovery kicks in and income and mining accelerates. We’ve upgraded growth for 2012 to 4.5%.

Global outlook
Although the global economy has been hit by a variety of shocks – Middle-Eastern political tensions leading to higher oil prices, the Euro-zone sovereign debt crisis and the disasters in Japan – we still expect global growth to average just over 4% through 2011 and 2012. Although down on the 5% growth seen in 2010, this is still a surprisingly solid outcome and stands above the 3½% average seen for global growth through the last 40 years.

There is, however, considerable variation across the world in terms of the strength of economic activity. Big emerging market economies like China, India and Brazil have become crucial drivers of global growth and, taken overall, the emerging economies should continue to account for around two-thirds of world economic growth through the next couple of years. As their growth has been very commodity intensive, this geographic profile of economic expansion should prop up commodity demand and support prices.

In terms of the developed economies, the US and core Euro-zone economies centered around Germany are the strongest performers with ongoing low interest rates and the weak US$ supporting activity in the US, while solid export growth and a broadening out in recovery to include domestic demand drives growth in the Euro-zone core. Euro-zone wide economic growth is, however, held back by continued weakness in the peripheral economies and that should keep the unemployment rate high across the Euro-zone.

Japan had appeared to be on the verge of acceleration in growth just prior to the earthquake and nuclear accident but these have completely changed the situation. Disruption to economic activity should hold 2011 growth down to only ½% and there is a fair chance things could turn out even worse. The UK is another economy where the recovery faces headwinds, this time from public sector austerity as the Government seeks to lower its very big budget deficit.

This blog was first published at NAB Health View and is republished here with kind permission of the author, NAB chief economist Alan Oster.