The slowdown to date has not been shared equally amongst the various sectors of the economy. The majority of the slowdown is being absorbed by the corporate sector, leaving households, the housing market and the government relatively unaffected.
Economic growth is forecast to slow further toward 2.5% per annum over 20X2 and 20X3. Key forces influencing this slowdown include tight financial conditions (notably the recent strengthening in the currency), constraints on capacity and an unsustainable current account deficit.
The slowdown will eventually filter through to the household and housing sectors and put pressure on corporate margins. As corporate profitability decreases, so will the labor market.
The household sector’s appetite for continued spending and debt accumulation is expected to diminish as labor demand reduces and the unemployment rate rises. With 60% of the economy driven by the consumer, there will be a large void left to fill.
Inflation is the dominant theme at this point in time despite the economic slowdown.
Business investment has been declining since the beginning of the period, and it will not be long before the cost-cutting focus shifts toward labor. If growth does reaccelerate or the labor market remains vibrant, the Central Bank will increase interest rates. We place a 30% probability on a further rate rise. We expect the interest rates to reach 6% by the end of 20X3; however, lower interest rates will take longer to stimulate activity.
While MU is expected to remain at its record high levels in the short term, the currency has reached a plateau. We expect it to remain around these levels for the next few months, which will lead it into a roller coaster ride down early next period, and is expected to remain weak until 20X5.