Australia's economic outlook for 2017
Investments | 18/01/2017 |
5 min read
If 2016 taught us anything it’s to expect the unexpected. Britain’s vote to exit the European Union and Donald Trump’s election as the next US President surprised the pundits and markets alike.
Markets generally hate surprises, yet in the closing weeks of the year so-called ‘Trump trades’ pushed share prices, bond yields and the US dollar upwards. The US Federal Reserve then lifted cash rates for only the second time since 2006 and forecast three more rises in 2017.
All the above was viewed as a vote of confidence in the US economic recovery and a signal that the global economic tide may be turning. This has broad implications for Australia and the local market.
Economy poised for growth
The Federal Reserve board forecasts US economic growth of 2.1 per cent in 2017 and unemployment of 4.6%. In Australia, the medium-term outlook is also positive but there were hiccups along the way in 2016.
Uncertainty surrounding the US election, as well as Brexit in the UK, and our own federal election weighed heavily on the local economy, which shrank 0.5% in the September quarter. This was the first negative quarter of economic growth since March 2011 and lowered the annual growth rate from 3.1% to 1.8%.
The Reserve Bank has warned that the economy could slow further before picking up in 2017. Australia’s trade performance is moving in the right direction though, thanks to higher commodity prices and the lower dollar. Australia’s trade balance moved back to surplus in November for the first time in 33 months; the rolling 12-month deficit of $23.8 billion was the lowest in 18 months. What’s more, the unemployment rate, at 5.7%, remains near three year lows.
|Australian key indices
as at 31 Dec 2016
|Share market (% chnage)
jan - Dec 2016
|GDPannual growth rate*
||Australia ASX 200
|RBA cash rate
||US Dow Jones
||UK FTSE 100
||China Shanghai Composite
||Japan Nikkei 225
*Year to September 30, 2016 Sources: RBA, Westpac Melbourne Institute, CommSec
One of the big turnarounds of 2016 was the surge in commodity prices. Iron ore almost doubled in price to $80 a tonne. Other metals were also up strongly, along with agricultural commodities and oil. Crude oil prices rose 45% to US$54 a barrel as OPEC and non-OPEC nations agreed to cut oil production.
While more expensive fuel is bad news for motorists, higher commodity prices are a boon for Australia’s mining and agricultural sectors and for Australia’s economy as a whole. As this extra export revenue flows through to higher company earnings and wages, they should help pave the way for central banks to lift cash rates to more normal settings.
Inflation in Australia is running at an annual rate of 1.3%, well below the Reserve Bank’s target band of 2-3% over the course of the economic cycle.
Interest rates on the rise
Australia’s cash rate remains at 1.5% but there are signs that we may have reached the bottom of the rate cycle. The major banks have already begun lifting home loan rates and this trend looks set to continue as mortgage funding sourced from overseas becomes more expensive.
Donald Trump’s election victory also marked a turning point in bond yields, on the expectation that his policies will be stimulatory for the US economy. US ten year bond yields rose slightly to 2.45% in 2016, while Australian 10-year government bond yields lifted to 2.8% after reaching an all-time low of 1.8% in August.
The US dollar has also strengthened against the Aussie dollar, which finished the year at US72c after hitting a high of US78c in November.
Shares finish strongly
Global share markets reacted positively to Trump’s promised tax cuts and infrastructure spending. The US market finished the year up 12% and Australian shares rose 7%, led by the resources sector.
Despite the solid gains in shares and residential property, Aussie consumers finished the year in a sober mood. The Westpac-Melbourne Institute Index of Consumer Sentiment eased to 97.3 in December, down 3.5% over 12 months.
By comparison, business confidence is improving. The NAB Business Confidence Index rose from 4.3 points to 5.0 points in November.
Patchwork property market
The residential property market continues to grow, but it was a tale of many markets. Home prices grew 10.9% across all capital cities, but a modest 2.8% outside the metropolitan areas. Although housing affordability remains a national issue, the property market shows no signs of a hard landing.
The prospect of higher interest rates and inflation, after almost a decade of abnormally low rates, marks a turning point for financial markets. There are bound to be setbacks along the way, as the world weans itself off cheap credit, but the gradual recovery in global economic growth is just what the central bank doctors ordered.
You can learn more about how the changing economic climate may impact your superannuation by speaking to an Equip financial planner.
This article is provided for general information only. It does not take into account your personal objectives, financial situation or needs and should therefore not be taken as personal advice. You should consider whether it is appropriate for you before acting on it and, if necessary, you should seek professional financial advice. Before making a decision to invest in the Equipsuper Superannuation Fund, you should read the appropriate Equip Product Disclosure Statement (PDS).