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Economic and Financial Market Update: The World Is Not Enough


  • The RBA kept the cash rate unchanged for the 17th successive meeting;
  • The accompanying statement was essentially unchanged from the previous month;
  • The stronger global economy is helping Australia;
  • But the RBA is still some time away from a potential rate increase

The World is not enough
But it is such a perfect place to start

‘The World is not enough’


The World is not enough’ was not one of the great James Bond films. The basic plot was that Bond was assigned to protect the daughter of a recently murdered billionaire. While doing so, Bond discovers a plot to boost oil prices by causing a nuclear meltdown in Turkey (Instanbul). The film got a very mixed reception from the critics. But it did earn over $US350m, so it must have done something right.

Being on top of world economic and financial events may not be enough to understand the Australian economy but it is a very good place to start. The RBA Statement following their March Board meeting was mainly upbeat about global developments. They noted that growth is above trend, and unemployment rates are (generally) low. They also indicated their view that the Chinese economy is doing well, and the Government is paying greater attention to financial sector risks.

This good economic news has led to a big step up of business sentiment in the OECD. And together with rising profits and low interest rates, it has meant that firms are increasingly happy to boost Capex spending. Improved sentiment has also led firms to create a lot more jobs, underpinning a significant decline in the unemployment rate. In turn, a better jobs market is boosting consumer sentiment (which is almost back near pre-GFC highs).


While the global economy is shifting into top gear, this did follow an extended period of weak economic activity. One outcome is that despite the improved economic momentum, OECD inflation and wages growth over recent years has been both below average and below most central bank inflation targets. Low inflation and wages growth might also reflect structural factors such as technological change and firms perception of greater competition. But cyclical factors looked to have also played a role. Inflation has picked up a little since the low recorded during the depth of the GFC. And while wages growth was also low, it is currently at its highest level since the GFC.



The recent bout of market volatility has attracted plenty of headlines. But leaving aside the recent noise, the improvement in the global economy and the still low level of interest rates has enabled a significant rise in global equity markets over the past year. Other indicators (such as credit spreads) suggest that global financial markets remain in good health. The RBA noted the rise in volatility but it has not appeared to have yet significantly altered their economic view.


So the global economic and financial market backdrop is positive. And this is helping the Australian economy. The RBA noted that weakness in exports at the end of 2017 is expected to be temporary. The level of commodity prices are above average. Abstracting from temporary factors, the volume of mining and agricultural exports is high. There are plenty of students coming to Australian universities, and plenty of tourists arriving at our airports. And there are also positive domestic factors. There is a boom in infrastructure spending in the eastern states, while the strong population growth means that the slowdown in residential construction appears more muted than some had feared. Business confidence is high, creating the good-news story of 2017 (very strong full-time jobs growth).

But while the economy is improving, it is not good enough. Other labour market measures (such as the underutilisation rate) suggest there are still plenty of people looking for a full-time job. We recently got a reminder that spending in the shops remains muted, reflecting the sluggish growth in household incomes. Inflation remains below the RBA’s inflation band, and both consumers and businesses indicate that pricing pressures in the economy are still low. There are good reasons for the $A to be trading in the high 70c range. But a stronger currency is also helping to keep domestic price rises low. All of that suggests that domestic interest rates should remain low for an extended period.

Economists have also come around to this view. The overwhelming bulk of economists expect no cash rate change for the next six months, or so. Opinion is evenly split whether there will be one 25bp rate increase in Q4 2018 (financial markets are broadly pricing the same odds). By mid next year 2% is the popular cash rate forecast (half percentage point higher than the current rate), although opinions are diverse.


For Australia, that the world economy is doing well is not enough. Our economy needs to run stronger for longer before interest rates need to rise. That will mean our cash rate cycle will lag (particularly the US) rate cycle, putting some downward pressure on the $A. So a strong world economy is not enough. But it is a very good start.

We live in interesting times.

This blog post is for general information purposes only and is not intended as financial or professional advice. It has not been prepared with reference to the financial circumstances of any particular person or business and should not be relied on as such. You should seek your own independent financial, legal and taxation advice before making any decision about any action in relation to the material in this article.


1 comment on “Economic and Financial Market Update: The World Is Not Enough”

  1. xanthitimes says:

    Thank you so much dear!

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