(Pictured: Steve Miller)

The headwinds to growth in Australia are more challenging than most people think, according to Steve Miller of BlackRock, who presented the firm’s latest global markets outlook last week. It’s a sombre view of the world.

Miller, investment strategist for BlackRock Australia, who has a long pedigree as a fixed income manager, said that the income shock implied by the sudden drop in the price of iron ore from around the $140 a tonne mark for most of the period between 2010-2013 to about $50 required “a lot of adjustment”.

“And I think the terms of trade coming off is more alarming. What happens when mining capital expenditure starts coming off? If it goes back to 2 per cent from its peak of 8 per cent that implies 1 per cent off GDP growth. And the outlook for cap-ex outside of mining is abysmal.”

He said that even since the Reserve Bank’s most recent interest rate cut, the figures showed that not only was mining investment “coming off a cliff”, investment elsewhere was not happening.

“I think the RBA will be dragged into at least two interest rate cuts this year, totaling 50bps. If I’m wrong, I think it will be 75bps,” he said. “It’s the only lever the Government’s got.”

He also predicted a rise in unemployment to 7 per cent by the end of this calendar year, with some risk of it going higher in 2016. GDP growth needed to be about 3 per cent to prevent unemployment from rising and BlackRock was predicting closer to 2 per cent.

The main positives to come out of the manager’s review were: selected international equities, including Japan and Europe due to low valuations and economic stimulus; US credit, included certain high-yield securities; and income-paying real assets, such as property and infrastructure.

Emerging markets as a whole were in a “holding pattern” but it was important to recognize the divergence within the group. Whether or not they were net oil or energy importers was important to their outlook.