The world economy remains strong and the near-term outlook is fairly bright, despite the recent escalation in trade tensions. Global growth is robust as major economies continue in mature phases of an extended economic expansion.
The unemployment rate of 4% is near an 18-year low and the US economy has added jobs every month over the past 93 months, which is the longest consecutive stretch on record. The tax cuts and additional spending are estimated to contribute nearly 2% of GDP per annum into the US economy for the next two years. This fiscal stimulus could trigger a rise in US inflation, from stronger wages growth, over the next year or two which could be problematic.
The growing threat of a US-China trade war is the key risk to the outlook for both emerging market currencies and equities. Even if trade tensions don't worsen, GDP growth in Emerging Asia has peaked and is likely to ease over the coming year.
A combination of tightening credit conditions and easing house prices will be a key concern for the Australian economy. The rise in headline inflation to be within the RBA’s 2-3% target range for only the first time in 15 months was due to a jump in petrol prices. There is not much price pressure elsewhere and, with underlying inflation having fallen back below 2.0%, the RBA is unlikely to raise interest rates soon.
The UK seems to have made some progress towards a soft Brexit but expect no clarity on a final outcome until later this year as significant uncertainties remain.
The UK’s Monetary Policy Committee (MCP) is unlikely to wait too much longer before raising interest rates. Although the beneficial effects on exports of the pound's fall may be fading, it is too soon to conclude that the sterling boost to growth is over.
At home the rebound in CPI inflation in the second quarter, from 1.1% to 1.5% (RBNZ figures), is encouraging, but with growth potentially slowing, inflation is unlikely to be strong enough to warrant interest rate hikes anytime soon.
Similar to Australia, a large contributor to inflation comes from a price rise in petrol. But the more recent fall in the oil price suggests petrol prices are unlikely to rise further. Overall prices were also held back by unusually large falls in vehicle and subscriber TV prices. A weaker housing market is also likely to hold back inflation.
It’s possible that underlying inflation will climb a bit further as the effects of the recent weakening in the dollar and rise in the minimum wage are felt. However, with potentially slowing growth, it’s unlikely that underlying inflation will challenge the upper limit of the RBNZ’s 1-3% target and be problematic for the RBNZ, who argue the next move could be equally to cut or hike the OCR. Public sector wage negotiations will potentially feed through to generalised inflation although the extent of the wage increase at this stage is uncertain.
The global economy is strong. The Fed is increasing interest rates and global trade disputes are the key risk to global growth. Investment returns have been strong for a considerable period, and we continue to recommend that a balanced approach to investment be maintained.