Consolidating growth against a background of contrast and complexity
22 June 2011
By Richard Gibbs, Global Head of Economics, Macquarie Group
There are increasing signs that the global economy is entering a period of consolidation in respect to the momentum of growth. In the key emerging economies of China and India moderating rates of GDP growth are the result of deliberate policy actions aimed at quelling inflationary pressures.
Importantly, recent data released in China suggest that policymakers may have been successful in dampening cost and price pressures without the need to severely restrain output growth in the economy.
In contrast, in the US, UK and the periphery of the Euro zone there are concerns that ebbing rates of GDP growth are symptomatic of ongoing structural issues in these economies.
Needless to say, key asset markets are again experiencing an uplift in volatility as investors seek to reassess the macroeconomic environment and the prospects for durable economic expansion. Moreover, ongoing shifts in the relative positions of economies in the global business cycle are also testing investor confidence.
Overall, we still expect the global economy to grow by over 4.0% in 2011 underpinned by the ongoing industrialisation and urbanisation of the key emerging economies. That said, we remain mindful of the risks to global growth that continue to emanate from elevated oil prices, geopolitical uncertainty and sovereign credit risk.
In Australia, notwithstanding an upbeat assessment of business investment plans, economic data has continued to reflect a weaker tone over the past few months.
Consumer spending, housing market and labour market figures all came in weaker than expected, while the National Accounts showed that GDP fell by a dramatic 1.2% in the March quarter.
That said, the decline in Australia’s economic output during the March quarter does appear to overstate weakness in the economy to some degree. Indeed, if the dramatic impact from natural disasters on Australia’s exports is excluded, the composition of growth was broadly in line with expectations.
Households continued to exhibit a cautious attitude toward spending in Q1, with the savings rate nudging up again, to 11.5% (from 9.7% previously). This was the result of a strong rise in household disposable income and an only modest increase in spending.
There were also small positive contributions to growth from government spending and dwelling investment, but we expect these components of activity to soften over the remainder of the year.
Meanwhile, the largest contributor to growth came from private sector investment, due to the surge in engineering construction. And, based on a survey of capital expenditure plans, we expect that this engineering construction – associated with investment in the mining sector – will be the key driver of growth over the remainder of the year.
The Reserve Bank of Australia (RBA) previously expected a fall in first quarter output of around 0.5%. Given that the actual decline was much more severe than this, it is increasingly unlikely that the RBA will be able to justify a rate hike in the next few months.
Indeed, even with some bounce back in the June quarter, this weaker starting point will make it increasingly difficult for the RBA to achieve its 2011 full year growth forecast.
That said, we expect that policymakers will look through the short-term impact from the floods on economic activity and focus on the anticipated rebound in coal exports over the coming months. And, as a result, there is a risk that the RBA retains its bullish growth outlook and its tightening bias.
This combined with the likelihood of resilient output growth in China and India and hence continued strong demand for commodities suggests that the Australian dollar will remain well supported over the remainder of this year. As a result, the domestic business environment will face the need for further adjustment in respect to the impact of a sustainably high exchange rate.