Quarterly Outlook: Trade Tensions on the Radar

The key points in this report are:

 

• The global economy continues to grow at a healthy clip, although risks to the global economic outlook have increased in recent months. Trade-war fears have escalated.
• The pace of domestic economic growth picked up in the first quarter of this year, lifting the annual pace to 3.1%. We expect growth of around 3.0% in 2018 and 2.9% in 2019.
• Weak wages growth and subdued inflation suggest the first RBA rate hike will take time to come to fruition. The risks are that the RBA does not start a rate-hike cycle until early 2020, reflecting the rise of global-trade concerns and short-term funding issues.
• Short-term funding markets worldwide are starting to feel the effects of soaring US dollar Libor rates. This rise in Libor rates, if sustained, will tighten financial conditions in Australia as it is more costly to obtain dollar-based funding.
• US 10-year bond yields broke above 3% on May 9 this year, but have since retreated. Over the next 12-18 months, we expect US long-term rates to be higher, but in the nearer term, yields may tread water. The upside for bond yields could be capped by the ongoing trade tensions. We expect US bond yields to drag Australian long-term rates higher.
• Growing downside risks to global growth, particularly with rising global-trade tensions, and an escalation of risk aversion have placed downward pressure on the AUD over recent months. Given that uncertainty surrounding global trade negotiations is likely to persist for some time, we have downgraded our Australian dollar forecasts.  We now expect the Australian dollar to end 2018 at 74 US cents and end 2019 at 76 US cents.

Please see the attached report for more information.

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