On 20th June 2012, Australian Business members joined Westpac Chief Economist Bill Evans over breakfast for our latest Quarterly Economic Update, kindly hosted by Robert Walters.
In a candid and broad ranging-discussion, Bill outlined his predictions for the global economy, Europe in the midst of financial crisis and the Australian economy in light of the mining boom.
Global Outlook:
Despite the International Monetary Fund (IMF) and Reserve Bank confirming a world growth forecast of 3.5% in 2012 Westpac has retained its somewhat downbeat forecast for global growth in 2012 at 2¾%. That will be driven by US growth of "only" 1¾%; a mild recession in Europe (–1%) and the slowest growth in China (7¾%) since the Asian financial crisis. He expects that the US will remain in a sub-par growth funk.
Europe:
For Europe, inappropriately severe fiscal austerity; along with credit constraints; waning support from the external sector and the need for the household and corporate sectors to deleverage will all represent significant headwinds. The European Central Bank (ECB), which has already provided generous liquidity support for the banks and, indirectly, the peripheral sovereigns, is likely to need to adopt a further stimulus supported by the European Financial Stability Facility (EFSF)/European Stability Mechanism (ESM).
The Australian Economy:
The overriding theme for the Australian economy is that it has been impacted by three independent forces which are constraining most sectors and regions:
1.Firstly, the aftermath of the boom in the terms of trade which has left Australia with a very high currency without the additional boost to incomes from further increases in the terms of trade;
2.Secondly, households are deleveraging in a rational response to record household debt and a soft housing market;
3.Finally both fiscal and monetary policy have been too tight. Only now is the Reserve Bank recognising this with a series of rate cuts. Westpac expects there is more to come with the official cash rate likely to reach 2.75% by year's end. The Commonwealth government has forecast that the fiscal position will "improve" by 3% of GDP between 2011/12 and 2012/13.