Global Economic Outlook Still shining lights in a gloomier world .:Macquarie Research

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Global Economic Outlook
Still shining lights in a gloomier world
Event
 We revise our outlook for the global economy.
Impact
 The global economy has slowed over the past month, with weaker-thanexpected
GDP results from the US, and indications of a temporary growth
slowdown elsewhere in the developed world as higher oil prices take their toll.
While in the developing world, policy-driven slowdowns and normalisation in
growth rates continue to unfold.
 Macquarie Economics' key macro calls are: above-consensus on US GDP
growth with the slowdown in US growth proving transitory, and exports and
business investment driving growth to 3.5% over 2011; that markets are
overestimating the likelihood of a rate rise in the UK, with it unlikely that the
Bank of England will move rates until 2012; and Chinese policymakers are
ahead of the curve on inflation, with existing policy tightening resulting in
growth softening over 2Q11. We also think that the consensus is far too
optimistic on the Australian growth outlook.
Outlook
 We retain our view on the strength of the US recovery. Despite weak 1Q11
GDP data that has seen widespread market downgrades to GDP forecasts,
we expect that the slowdown will be transitory, resulting in significantly above
consensus US growth of 3.5% over 2011. The weaker 1Q11 data hinged
on temporary weather effects and a surprise fall in defence spending, which
are unlikely to be repeated.
 Indeed, the US recovery should continue to gain momentum, driven by
exports and business investment. Exports should be encouraged by the
weaker US$ and high agricultural commodity export prices. Business
investment intentions also remain elevated, suggesting that companies should
start to lift spending, particularly given the good revenue growth evident in the
1Q US reporting season. Improvement in employment should also support
consumption growth.
 Given the expected strength of the economic recovery, a key issue for
investors is the likely timing of a monetary policy response from the Federal
Reserve. We continue to expect that policymakers will complete QE2 by end-
June, and hold the size of the Federal Reserve's balance sheet constant
following this, before changing tone on inflation and growth in the subsequent
months to signal the beginning of asset sales heading into 2012, with the first
rate hike forecast for 1Q12.
 With the growth outlook in the UK remaining subdued, markets are
overestimating the likelihood of a rate increase from the Bank of England. We
continue to expect that UK rates will remain on hold, at 0.50%, until 2012,
compared to consensus expectations of 2-3 rate hikes by the end of 2011.