Fully recognising the dangerous slowing in the global economy, central banks around the world continue in their attempts to stabilise it and encourage growth.
Last month the US Federal Reserve and the European Central Bank cut interest rates. They were followed early this month by the Reserve Bank of Australia, slashing its cash rate to the historic low of 0.75 per cent, with more likely to come.
Even though some banks, such as Australia’s big four, do not pass on full rate cuts in their own interest rates, ANZ’s chief investment office expects what they do cut should provide some financial relief to households and boost the services sector, which is the dominant economic sector in the developed world. This will counter damage caused by global trade tension, at least to some extent.
What is less clear at this stage —and this is the key risk we see in the short term—is whether we have further to go in the downward leg of the traditional industrial cycle.
If this cycle weakens further it would likely erode consumers’ confidence and their willingness or ability to spend, and lower employment, which would seriously discourage economic activity, countering the stimulus effect of interest-rate cuts. (This situation would also see the Australian dollar drop further in value.)
We expect this slowing cycle will level out next year but this stasis could easily be rocked by escalation of the US-China trade war and such factors as rising labour costs in the US, which could reduce companies’ profitability.