Global markets fall again - what is the economic outlook?

Monday, 24 June 2013  Media Alerts

A senior academic from the Australian School of Business is available for comment after heavy losses on the Australian dollar and shares following a tumultuous week on overseas markets.

James Morley, a Professor of Economics at UNSW's Australian School of Business, said "it seems fairly clear that the recent weakness in the dollar reflects financial market expectations about future monetary policy in both Australia and the United States."

Global markets have fallen sharply after the Federal Reserve signalled it may begin to scale back its stimulus of the US economy later this year. The expectation of rising interest rates also infected bond markets, which normally provide a safe haven from falls in the stock market.

He said "the two year yield on Australian Government Bonds is about 2.5%, which is below the current cash rate of 2.75% set by the RBA. This suggests that financial markets anticipate that the cash rate will be cut more over the near term."

The markets were spooked last week after Federal Reserve chairman Ben Bernanke said the US central bank could begin slowing down its quantitative easing programme of asset purchases by the end of 2013, and wind them down completely by the middle of 2014. The Fed has been buying bonds at a rate of US$85 billion a month, but believes it may be able to scale this back as the US economy recovers.

James Morley has been watching the markets, and is a member of the RBA Shadow board, which meets each Thursday before the decision by Reserve Bank of Australia board. He said "financial market expectations about interest rates and US monetary policy is the biggest driver of the recent fall in the Australian dollar. The reason I think this is because other currencies such as the Canadian dollar have also fallen and there is no similar expectation of lower future interest rates in Canada, as there is for Australia."

He has examined the near-term outlook for economic activity in Australia, which he said is linked to China. "Even though the recent Chinese GDP numbers still suggest reasonable overall growth, fears that investment will weaken - and that slow growth in China will further dampen commodity prices - suggest more downside risks here, and the RBA may continue to cut in the future. This is certainly what the market is expecting. At the same time, real interest rates are already quite low in historical terms, which is having the desired impact on the dollar. Given that inflation is stable, the RBA will want to avoid fuelling an asset price boom with excessively low real interest rates, so they may want to see how the current low levels feed through to the economy before cutting further."

For further comment call James Morley on 02 9385 3366, 0406 842 550, or james.morley@unsw.edu.au

Media contacts:
Julian Lorkin: 02 9385 1574

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