Economic outlook – Autumn 2017
What’s in store?
Riccardo Briganti – Investment Specialist, BT Advice
The new year started on an optimistic note with global economic sentiment. Manufacturing surveys largely maintained the strength seen in late 2016 with the US purchasing managers index rising to 56 in January from 54.5 in December – the highest level in more than 2 years. Strong results were not restricted to the US. Europe and Japan also saw improvement in January from already strong end of year results. While Chinese and UK results eased back slightly they continue to suggest economic expansion. Furthermore, the results were not restricted to manufacturing, with the services sector showing similar strength.
The results are encouraging, particularly in the US, where the US Federal Reserve increased the fed funds rate in December 2016 by 25 basis points to 0.5%-0.75%. The increase was small and while interest rates remain low by historical standards, there has been concern in some quarters that the economy remained fragile and interest rate increases could impact growth prospects. US consumer confidence declined in January but remains above levels seen during most of 2016. Other indicators such as employment data remain robust.
Domestically, the Reserve Bank of Australia (RBA) left monetary settings unchanged at 1.5% in February. The two domestic rate cuts in 2016 and the pick-up in the global growth pulse informed the decision to leave rates unchanged while temporary factors were seen as causing the fall in GDP in the September quarter. The commentary accompanying the decision suggests the chances of further rate cuts are low. In particular, the RBA expects Australian GDP growth to be around 3% for the next couple of years. Consumption spending is seen picking up from its recent lacklustre showing and resource exports are expected to continue as a strong contributor to growth. Inflation is forecast to move back into the RBA’s target zone through 2017.
The market’s positive assessment of Trump’s proposed policy agenda of corporate and personal tax cuts and increased infrastructure spending, together with continued improvement in economic momentum has seen US equities power ahead. In the three months to end January, the S&P500 Index returned 7.8%. The Australian equities market as measured by the S&P/ASX200 also showed a solid 6.7% return over that period but faltered somewhat in January, declining 0.8%. The same drivers of the encouraging equities trend has put pressure on fixed interest markets with the US 10 year government bond yield rising to 2.5% at end January from 1.8% three months earlier. The equivalent Australian government yield rose to 2.7% from 2.3%.
In the currency market, the Australian dollar recently appreciated significantly moving above the $US0.76 level from $US0.72 less than two months ago. Reduced expectations of domestic rate cuts and stronger commodity prices helped the A$, as did data showing a substantial improvement in Australia’s trade surplus.