- NAB expects slow US growth rather than recession
- More significant QE measures unlikely in such an outcome
- Australian growth should be solid in 2H11
- This suggests no near-term rate cuts by RBA

By Chris Shaw

National Australia Bank head of research Peter Jolly has just returned from a two week trip to visit clients in the US, a visit that has offered some additional insights into the likely outlook for the US economy in particular.

Jolly notes the market now expects weak US economic growth for many years as households continue the process of repairing balance sheets through higher savings and as the Fed tightens fiscal policy. On a more positive note, few in the market are expecting an outright recession in the US. In Jolly's view the latter appears the correct assessment as data from the US have been soft rather than weakening significantly.

In general, Jolly suggests US companies are in good shape, while most fund managers appear to have relatively positive views on US corporate credit. In general, US assets such as houses, credit and equities are regarded as cheap, but Jolly notes few are looking to buy such assets before the issues in Europe settle and prices stop falling.

Jolly also notes both the Federal Reserve and Ben Bernanke are regarded as both maligned and compromised. This suggests the US economy would need to get considerably worse before there was any new quantitative easing program put in place.

With US interest rates effectively at zero at present, Jolly notes returns are being sought further out the yield curve, down the credit curve and in foreign markets. This means most fund managers have a positive longer-term view on higher yielding currencies such as the Australian and New Zealand dollars, even allowing for the potential for further falls in both if the issues in Europe play out badly.

Jolly's conclusion is slow US growth rather than a renewed recession still appears most likely, with the biggest issue at present being how Europe's sovereign debt issues are resolved.

From a domestic perspective, Jolly suggests while downside risks for the global economy are increasing Australia should still see solid second half growth. Inflation doesn't appear likely to come down by enough for the Reserve Bank of Australia (RBA) to cut rates, so no change to the cash rate is expected at today's RBA meeting.

Jolly notes this contrasts somewhat to market expectations, as a cut is 36% priced in at present. The RBA statement accompanying the meeting should go some way to dashing hopes of near-term rate cuts, Jolly pointing out the market is currently pricing in 75-basis points of cuts by early December.