It’s that time of the year – to stick necks on the forecasting chopping block in an attempt to anticipate important trends in the economy and financial markets.
It is important to have some idea where things are going, whether you are an individual with savings, a mortgage or superannuation, a small business person, someone involved in business or indeed government.
So here are my calls for 2018.
1. Global stocks
Having registered terrific growth in recent years, a cyclical pull-back in stocks seems to the on the cards during 2018. “Don’t fight the Fed” might prove to be apt again with a near certain continuation of monetary policy tightening from the US Federal Reserve and a wind back in QE. Overlay other policy/political risks from the Trump administration, I would be looking for the S&P500 to fall by 10 per cent or so to around 2,150 (or lower), the Dow down to 21,800 and would kick off the year with a trade to capture that sort of decline. Risk: Further downside
2. The ASX
Australian stocks are inexorably linked to commodity prices and the housing cycle, both of which are erring on the down side. With a probable change in global sentiment towards stocks, the ASX200 is forecast to pull back to 5,750 through the year. So not a bad result, but more likely down than up. Risk: Upside
3. The Australian dollar
I’m bearish the Aussie dollar in part because of domestic economic slumber, but also because of a further erosion of the interest rate gap between Australia and the world, a topping out in commodity prices, politics (2018 is likely to be an election year) and a turn in sentiment towards the US dollar. I’m looking for a break below US0.7000 and to dip on the cirss rates, most notably the NZD (to 1.0000) and EUR (0.6200). Risks: Upside
4. Monetary policy and bond yields
OK – the big call which is the glue that feeds into other forecasts. It is that the RBA will continue to see ongoing low inflation, weak wages, a notable dip in house prices and it will eventually trim interest rates, perhaps twice, to 1.0 per cent by year end. With rate hikes priced into the next year, the trade is to be long the OIS (or IBs) which is profitable even if there is no cut. An interest rate hike, into a weakening housing market. The year kicks off with 10 year bonds yielding around 2.75 per cent – – the call is for yields to tick a little high in the latter part of the year driven by a bearish US lead, but this will imply Australian 10 years will trade 50 basis points below equivalent US rates. Risks: Downside (for yields)
5. GDP Growth
A few ups and a few downs but basically annual growth will be in a 2.25 to 2.75 per cent range throughout the year. Any break in GDP growth towards and then above 3 per cent will be difficult with household consumption spending (over 50 per cent of GDP) held back by weak incomes and the housing downturn. The housing downturn will crimp growth in the latter part of the year. The good news will be in the form of what should be a strong upswing in private sector CAPEX, which should growth by 5 per cent and more, solid exports and a sustained level of public sector demand. Risks: Downside via housing
6. Labour market
A mediocre economy will see employment growth moderate in 2018, with annual jobs growth cooling to around 1.25 per cent from the break-neck 3 per cent registered in 2017. This will see the unemployment rate remain near 5.5 per cent and the risk is a rise towards 6 per cent in the labour-intensive retail space continues to be pressured by sluggish consumer demand. Annual wages growth will remain near flat, perhaps inching up towards 2.25 per cent, but this will not be sufficient to underscore a material rise in incomes or purchasing power. There are likely to be some reassessments about the level of full employment in the economy with the firm conclusion focussing on a figure well below 5 per cent. Risks: More acute weakness in labour conditions
Inflation remains a dead duck – in underlying terms it will be between 1.5 and 2 per cent right through the year with no trend emerging to help guide markets. Global pressures, technology, sub-optimal growth and intense competition at the consumer level will keep a lid on any inflation pressures that might emerge from a sold level for global growth. Risks: Nuetral
8. The Budget
In May, Treasurer Morrison will announce a $20 billion ‘improvement’ in the budget bottom line over the 4 years of the forward estimates. A lift in commodity prices will account for the bulk of these gains. Accordingly, the 2018-19 budget deficit will be slated to be around $15 billion and as it will likely be the final major economic statement before the election, there is a risk of fiscal largesse in the form of additional government spending (from an already high base) and income tax cuts. Gross government debt will reach a new record around $560 billion by year end. Risks: a wider deficit if the largesse is extreme or the weaker economy hinders revenue
9. Commodity prices
The tug-o-war between a solid expansion in the global economy and a ramping up of output will likely see some consolidation of commodity prices although the risks remain to the downside given the falling cost of production and possibility of a less robust Chinese economy. Oil should settle near US$50 a barrel while iron ore could ease a little to the mid US$60 a tonne die mainly to supply issues. The RBA index (in USD terms could well end the year little changed from today. Risks: Downside
10. House prices
A tightening in lending, buyer fatigue, poor investment returns and a solid supply of new dwellings will keep downward pressure on prices. It looks like the falls in Sydney prices evident since September 2017 will continue into 2018, while Melbourne prices will ease a little. National house prices are forecast to drop by between 5 and 10 per cent. Risks: Neutral
Good luck – may the markets go your way.