Why the global growth slowdown matters

Photo: Stefan Postles/ Getty.

If there’s one thing investors have come to grips with in recent years it’s downgrades to global growth expectations. The pattern of initial optimism turning to subdued reality is now a given rather than a surprise. Be it the World Bank, IMF or others, it seems that each new week brings another downward revision to the global growth outlook.

Citi is one of the latest banks to downgrade their expectations, slashing their 2016 global GDP forecast by 0.2 percentage points to 2.9% last week on the back of downward revisions to a number of major economies, both developed and emerging.

Unfortunately, as a nation that hitches its own economic performance to that of the global economy, this will have implications for Australia, according to the bank’s Australian economic team of Paul Brennan, Josh Williamson and Vivian Jiang.

The chart and table below, supplied by Citi, reveals the dramatic decline in global growth expectations — not only for 2016 but 2015 and earlier — along with recent forecast downgrades to major economies such as the US, China, eurozone, Japan and India.

As you can see, the growth outlook for Australia’s top two export destinations — China and Japan — have been lowered by Citi and this may see Australia’s economy transition away from mining infrastructure investment towards other drivers of growth such as increased export volumes take longer to achieve.

“Last week we cut our Australian export growth forecast by ½ percentage point to 6.6% for 2016. Citi’s latest global view argues for downside risk to this forecast. World trade growth continues to slow. It was already soft at 3.3% last year and has ground lower to 1.8% YoY in January to July this year, the weakest since 2009”, the trio note.

“Any further moderation in the performance of Australian exports at a time of subdued domestic demand growth implies a longer period of below potential growth.”

While Brennan, Williamson and Jiang believe weak global economic growth may prolong Australia’s economic transition, they note that the change in Australian political leadership two weeks ago may help to buttress Australian growth expectations.

“The leadership change in Australia last week potentially provided a springboard for improved business and consumer confidence and could re-energise the reform programme. Indeed, the latest weekly reading on consumer confidence bounced strongly (up 9 points), with the component surveying perceptions of the economy one year ahead rising very strongly (up 21 points). A major poll showed the government had returned to a leading position for the first time since a brief time in April last year. If confidence does lift in a sustained fashion, this could help kick start stronger consumer and business spending, but it is too early judge this, particularly as political and economic realities kick in,” they wrote.

That’s the multi billion dollar question — can Malcolm Turnbull’s prime ministership mitigate any further slowing in Australian economic growth through improved consumer and business confidence and an acceleration in fiscal and policy reform? Time will tell. But as Citi point out, it’s far too early to judge whether or not that will take place.

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