Australia won’t benefit much from global recovery

The latest data suggest that we are right to be more downbeat than most on the outlook for Australia this year but more upbeat than most on the prospects for New Zealand. While both economies will benefit to some degree from the recent improvement in activity overseas, Australia is more exposed to the easing in China that still looks likely and a further drop back in commodity prices. A slowdown in consumption growth and a stagnation in dwellings investment will contribute to GDP growth in Australia slowing from 2.5% last year to 2.2% this year. In contrast, strong construction and tourism activity will enable growth in New Zealand to rise from 3.1% to 3.5%. Continued low underlying inflation will prevent the central banks in both countries from increasing interest rates until 2019 at the earliest. In fact, low inflation may yet trump financial stability concerns and prompt interest rates in Australia to be cut from 1.5% now to 1.0%.