July 17, 2015  /  7:03 AM
World Growth Picks Up

Over the last couple of months, world growth has started to re-accelerate. In Europe (about 20% of the world’s economy) growth has started to recover after the European Central Bank (ECB) stepped up its program on monetary stimulus by buying more government bonds (called “quantitative easing” or QE). In the US (25% of the world economy), a mini-slump caused by very cold weather in the eastern US in the first quarter of the year has ended, and the economy has picked up. In China (15-20% of the world economy) the growth rate has stopped falling and has picked up marginally. Of course, a Chinese recession is where growth is “only” 7%!

What does this mean for Australia?

World GrowthAs the chart left shows, Australian growth has tended to track world growth quite closely. So normally one would expect growth in this country to start to improve as the world economy recovers. This time, though, it’s a bit more complicated. Our major commodity exports (iron ore and coal) have fallen sharply in price partly because of the Chinese growth slow-down (China is the world’s largest consumer of raw materials), but also because of a big jump in supply (the ironic result of the mining boom we enjoyed over the last 10 years). And the price of our most promising new export, gas, is being driven lower by the slump in the oil price. So though volumes of exports may be strong as we ship more minerals, what we are getting paid for them is not growing. And as the mining boom tails off, employment growth is slowing and, just as important, wage growth is stagnating. A falling Australian dollar is helping, but it will need to go lower still to provide a strong enough push to get high growth again.

All this means that though growth will remain positive, it will be far from a boom, and, moreover, it won’t “feel” like a boom because wage increases are so low (lower even than during the GFC). But it also means that the RBA’s cash rate is likely to remain low and even drift lower over the next couple of years. Which in turn implies that the share market will probably inch steadily higher, though here too, a boom seems unlikely.