FYI | Jul 02 2009
By Chris Shaw
Commonwealth Bank chief economist Michael Blythe suggests the unprecedented policy response of governments to the global financial crisis has been enough to keep the global economy from a worst case scenario, especially given some signs financial markets are starting to work again, some economic data have started to come in better than expected and sentiment has improved.
The result has been some upward revisions to global growth forecasts with more likely to follow, as for example Blythe notes there is speculation the International Monetary Fund (IMF) is set to lift its 2010 growth forecast for the global economy to 2.4% from 1.9% previously.
Given such an environment, Blythe suggests it is worth looking at just what shape any recovery is likely to take. With that in mind, the first point he makes is factors that make recessions associated with a financial downturn longer and deeper than typical downturns also mute the pace of any recovery.
Blythe expects the expansionary policies currently in place will remain for some time as rate hikes from the major central banks are unlikely before late in 2010, with the problem in the interim being determining what will be appropriate exit strategies for stepping away from today’s policies.
With respect to Australia, Blythe suggests the economy managed to avoid the recession through a combination of good luck and good policy, with the most likely outcome now being upward revisions to growth forecasts. As an example, while the Budget suggests the Australian economy will contract by around 1.0% in 2009/10, Blythe expects it will record growth of 0.5-0.75% and while this is below trend it would be enough to stop unemployment reaching the government’s forecast of 8.5%. His forecast calls for a peak of 7.0% in this measure.
One point Blythe notes about the outlook for the Australian economy is the composition of global growth is just as important as the size of growth as most of the upgrades to growth are coming out of Asia, which is a key trading region for Australia.
What will hold back headline growth however is the lagged impact of commodity prices in the bulks sector in particular, as on Blythe’s numbers lower coal and iron ore prices this year are likely to take about 1% off the headline growth number.
Blythe also expects inflation to be back within the Reserve Bank of Australia’s (RBA) target range of 2-3% by early in 2010 and with the current account deficit likely to return to about 4.5% of GDP in coming months, he sees the RBA as not wanting to cut rates much from current levels. While one further 0.25% cut is likely, he expects the RBA will be one of the first to switch to lifting rates when the opportunity presents itself.
The first hike should be in the September quarter of 2010 on his timetable, while rates are expected to be back to a neutral level of 5.5% by the second half of 2011. With US interest rates likely to remain low for some time given issues such as ongoing weakness in the US housing market and the need for further repairing of balance sheets the background conditions favour further appreciation in the Australian dollar in Blythe’s view.
This suggests further weakness in the greenback is likely given it is a counter-cyclical currency, while he expects the yen should also weaken given it is even more counter-cyclical than the US dollar. In contrast the euro should benefit as US investors return to overseas markets as risk appetite increases.
In terms of currency forecasts, Blythe expects the euro/USD to trade to 1.40 by the end of September, 1.42 by year’s end and 1.47 by this time next year. For the USD/yen he is forecasting 98, 105 and 115 respectively over the same time frames, while for the AUD/USD his forecasts are for 80c, 84c and 89c respectively.
