Commonwealth Bank of Australia (ASX:CBA) Chief Economist Michael Blythe speaks with The Capital Network’s Lelde Smits about how Australia is positioned to face global headwinds.
Lelde Smits : Hello I’m Lelde Smits for The Capital Network and joining me here at the Commonwealth Bank of Australia in Sydney is the bank’s Chief Economist Michael Blythe. Michael, welcome to The Capital Network.
Michael Blythe: Thank you.
Lelde Smits: Now Michael we have had Australian’s feeling pretty pessimistic in 2015, there’s even been talk of a recession. Do you believe that this is something that may occur and is it overdue?
Michael Blythe: Well we have seen this recession talk surface from time to time over the last couple of years and it’s easy to understand why when the economy is facing some pretty big headwinds. We are decending this mining capex cliff, we’re dealing with the fall out from those big falls in commodity prices and the income weakness that is gone with that. But you’d have to say that, so far, the economy has done remarkably well.
Lelde Smits: OK well so maybe no recession on the horizon, but you did mention some headwinds there. What may be some other global risks that you’ll be keeping in your sight?
Michael Blythe: Well that’s the interesting thing about 2016. We can actually see more global risks to the Australian economy that we can see domestic issues. And the big ones of course at the moment are, what’s happening in China, how far will the slowdown there go, what will it mean for commodity prices and for Australian exports and income. And also, the US, the Federal Reserve has started this process of lifting interest rates, something we haven’t seen for a very long time. In fact the last time the Fed raised interest rates the iPhone didn’t exist, to put it in some sort of context for you.
Lelde Smits: That certainly is some context.
Michael Blythe: So, challenges from higher rates is something we haven’t had to deal with for a long time, and as I say, China is the real focus for us. We think a lot of that China slowdown is in fact a permanent ongoing feature of the landscape which just reflects what happens when economies mature and as they need to transition to other growth drivers. But, there is a cyclical component as well that we think will probably improve this year as the policy stimulus in China, they’ve applied last year, starts to take effect.
Lelde Smits: OK Michael final question. Fast forward in 12 months time, where do you see the key cash rate ending 2016?
Michael Blythe: We don’t think the Reserve Bank will have very much to do this year so we think the cash rate will end the year at 2%. The economy we think is improving, certainly inflation is low enough, they can cut if they need to, so that is the direction of risk there. But, by would say by any intrinsic measure the economy doesn’t look like it needs any extra stimulus.
Lelde Smits: Excellent, well good to end on a positive note and thank you for joining us here at The Capital Network.
Michael Blythe: Thank you very much.