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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, General

Ongoing political changes are coming with mounting evidence that the US economy continues to recover. Markets remain in the grip of expectations President-elect Trump will boost spending and fund it by issuing more debt. Economists predict that a full implementation of the main components of Trump’s policies – the corporate tax rate cut to 15%, reduced personal income taxes, and infrastructure spending amounting to 0.5% of US GDP – would provide a substantial boost to the US economy.

Under this scenario, by the end of 2018 growth would rise above 3%, the unemployment rate would fall below 4%, and the US cash rate would be an additional 50 basis points higher than the US Fed’s current projections. All this suggests bond yields will continue to drift higher as the US transitions to a period of “normalising” interest rates, starting this week with an expected US rate hike.

In contrast, the RBA currently sees monetary policy comfortably on hold with a very slight easing bias while inflation remains low.  The surprise larger than expected negative GDP number for the September quarter released last week pushed annual GDP growth down to only 1.8% and well below the bottom of the RBA’s year-end forecast range of 2.5% to 3.5%. While the slowdown in growth may be seen as temporary by the RBA, the broad-based nature of the slowdown and its depth suggest economic growth faces strong headwinds to improve. If we get another downside surprise to the RBA’s GDP forecast of around +0.5% for the December quarter (due out on 25 January) we could see the RBA forced to ease further or at the least move to an easing bias. For now though, let’s focus on getting over the Christmas holiday season.

This will be our last Weekly Economic Commentary publication for 2016. The Rural Bank Treasury Team wishes you compliments of the Season and look forward to being back with the next edition of the Weekly Economic Commentary in early January 2016.

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Source: Rural Bank

 

Disclaimer: Whilst all care has been taken in compiling the information, the information should not be relied upon as substitute for professional advice where necessary. Rural Bank Limited accepts no responsibility for the accuracy, completeness or timeliness of the information and disclaims all liability in relation to any loss or damage suffered by the use of or reliance upon any information contained herein or in any attachment or annexure hereto by any person. Rural Bank Limited ABN 74 083 938 416 AFSL 238042. Registered office: L6, 80 Grenfell St, Adelaide SA 5000.