The Australian Economic Outlook
The Australian economy is set to grow modestly in 2016 and reach 25 consecutive years without a recession. Low interest rates and a lower AUD should help counteract weaker capital spending in the mining sector.
Labour market indicators remain firm, business sentiment is mildly positive, demand for credit is edging higher and export volumes are set to increase. The major risk to the Australian economy is weaker than expected growth in China and the United States.
The Outlook for Interest Rates
We expect the RBA to leave its cash rate on hold throughout 2016. Further rate cuts appear unwarranted this year, while a rate hike can wait until 2017. The downside risk to our view is if the global economy slips into a new economic crisis.
Australian bond and swap yields are expected to edge higher in 2016 as the US gradually lifts its Fed funds rate. Ongoing low inflation, modest global growth and quantitative easing in Europe and China should limit the increases in yields.
The Outlook for the Australian Dollar
Renewed concerns regarding the outlook for China and falls in commodity prices have driven the Australian dollar to a seven-year low since the turn of the year. The key risk remains the uncertain outlook for commodity prices.
We expect the AUD to mostly trade near 70 US cents over the first half of 2016, notwithstanding some volatility while financial markets remain on edge. Our end of 2016 forecast is 74 US cents, reflecting growing signs of a pickup in domestic growth towards the later part of the year.
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Bank of Melbourne