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
During a holiday clean up, I came across an email that my former colleague at TD Securities, Jacqui Douglas (who is now Chief European Macro Strategist in London), circulated a little before I left.
It was apparently a list of rules that David Rosenberg, Chief Economist at Merrill Lynch at the time, circulated about being a good and relevant market economist.
The list, reproduced below, should be seen as an Economists Constitution. For those in the business of economic forecasting and market strategy, read it and see how many of the rules you stick to and how many you break. It is a lot of fun and certainly something that should also be read by those covering economics and markets, especially those who seem to have a strong bias to give oxygen to those who break most of these rules.
Here they are:
A year ago, I outlined 10 top calls and forecasts for 2017 for the economy, markets and policy.
The full text of those calls are included below, and my self-rating of the success out of 10 for each of them is in the square brackets in bold. I have tried to reflect the underlying success of the forecast and whether there was money made by taking a position in markets on the basis of those forecasts.
Let me know if you disagree.
In 2016, I got a borderline 50% for my forecasts – it was a mediocre year.
This year has been a whole lot better at 62 per cent which, when it comes to forecasting, economics, policy and markets, is a great result.
I am happy, most of my clients are happy and my 2018 calls will be out in the next day or two.
1. Global stocks
When the dust settles from the irrational market reaction to the US Presidential election win of Donald Trump, US (and most global) stocks seem set to fall. Trump policies in trade, foreign affairs, accountability on government spending and tax could all conspire to undermine confidence when the reality of the misguided policy strategy of Trump moves to reality. How much weakness is hard to say, but the Dow, for example, back to 17,500 would seem likely. It could fall further than this. [0/10 By far the worse call, and hopelessly wrong. The geopolitical issues did not amount to zac, the markets appear to be unaware of the issues associated the crunching of the US budget position, and the tax cuts were a positive for markets. US stocks boomed and I was wrong.]
2. The ASX
With the bearish lead from the US, a likely dip in commodity prices and a firm Australian dollar, expect some pull back during 2017. The ASX may hit 6,000 in the early part of the year, as local interest rate cuts are delivered but the negative influences from offshore will likely counter that. A dull forecast, in many ways, but 5,250 for the ASX200. [4/10 It was a solid year for the ASX with a gain of about 7 per cent, 31 December on 31 December. It hit 6,000 points late in the year, not early, which was a favourable position to take at the start of the year. My within year forecast was askew.]
This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/2195187-050039322.html?soc_src=social-sh&soc_trk=tw
Ignore the spin, government debt is going up and up
Despite all the spin and torture of the data, government debt is still rising, the return to budget surplus is based on fickle economic forecasts and the Turnbull government is on track to be one of the top 10 taxing governments in Australia’s history.
Gross government debt is already at a record at $520 billion and it will keep rising through till at least 2027-28 when it will reach a new record high just under $700 billion. Net government debt (which allows for some of the assets the government owns to offset gross debt), will reach a peace-time record in 2018-19 when it hits 19.2 per cent of GDP, having roughly doubled from the time of the 2013 election.
This is a long way from promises of the Liberal Party prior to it taking office to run budget surpluses and pay off debt.
With Treasurer Scott Morrison delivering the Mid Year Economic and Fiscal Outlook, the new record levels for government debt were confirmed, notwithstanding a small narrowing in the budget deficit which was driven by an unexpected rise in the iron ore price which fed into company profits and taxes paid to the government, as well as higher superannuation taxes based on the solid performance of the stock market last year.
The budget is forecast to return to surplus in 2020-21, but this will require everything to ‘go right’ with the economy between now and then. GDP growth is forecast to pick up to 3 per cent in 2018-19 which, according to Treasury, will underpin a solid rise in employment and a further acceleration in wages. A stronger economy will deliver higher taxes which is the driver of the return to surplus, so the theory goes.
The illion Business Expectations Survey presented a positive outlook for the economy.
Business profits expectations for 2018 are the highest they’ve been since 2011, with companies set to boost employee numbers in the first quarter on the back of the positive outlook, according to illion’s latest Business Expectations Survey.
Data from the survey indicated businesses operating in the Finance, Insurance and Real estate sector had the highest profit expectations approaching the new year, followed by the Transport, Communications and Utilities sector. The survey shows that overall, the Business Expectations Index is up 25.7 percent on the same period last year and the actual performance of businesses across all sectors is at a 13 year high.
Stephen Koukoulas, illion Economic Adviser, said there were a number of factors driving the positive outlook for 2018. “Corporate profits are getting a boost from lower costs, which are being driven by record low interest rates and on-going low wages growth – which is all occurring at a time of solid gains in the ASX”.
This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2138618-050543271.html
Oz economy: The good, the bad and the ugly
The Australian economy continues to grow, but the pace of expansion remains moderate, being constrained by ongoing weakness in household spending and a slide in housing construction. The good news is further evidence of an upturn in private business investment and stronger growth in public sector infrastructure spending which is providing support for the economy.
At face value, 2.8 per cent annual GDP growth rate is quite good, but the devil in the detail on how that growth has been registered is why there are some concerns about the sustainability of the expansion as 2018 looms.
Household spending remains mired with growth of just 0.1 per cent in the September quarter. It seems the very low wage growth evident in recent years, plus data showing a small rise in the household saving rate, is keeping consumer spending in check.
Making up well over half of GDP, household spending will be the vital element of the economy into 2018. If wages growth remains weak, there seems little prospect of a pick up in household spending. And if household spending remains weak, bottom line GDP growth will be relying on a strong expansion in business investment and public sector demand.
The changing nature of work is causing significant disruption within the economy and for workers confronting an erosion of their take home pay and basic workplace conditions.
The precise nature of these changes is still unfolding in line with the spread of technology, the move to a more casualised workforce, globalisation and the steady decline of union influence.
The recent Per Capita round table discussion of these issues was particularly enlightening, not least because the participants helped to articulate how widespread these trends in the labour market are becoming, but they also covered what these changes might mean for the economy and the policy settings needed to ensure strong growth and a decent society.
One of the most potent manifestations of the workplace changes in the past decade or so has been the hit to wages. After several decades of annual wages growth around 3.5 per cent (which equates to an increase of around 1 per cent per annum in real terms), wages growth has slumped in recent years.
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/2073035-004930587.html
Watch out below! The Aussie dollar is about to sink
Watch out below! The Australian dollar is on the cusp of a significant fall. Already in recent weeks it has slumped from about 81 US cents to around 76 US cents at present and the factors that generally hold sway over the direction of the Aussie dollar suggest more falls are in store.
Commodity prices are going nowhere. The days of US$150 a tonne iron ore and massive prices for coal are well past. While the week-to- week changes in commodity prices can appear extreme, they are in a range a good 40 to 60 per cent lower than the peak levels around 5 years ago when the dollar traded as high as 1.10 against the US dollar.
Also keeping commodity prices lower is the fact that miners have slashed the cost of digging these commodities out of the ground. They can sell their output at a lower price and still have a healthy profit, because of this cost cutting. At the same time, the tens of billions of dollars invested by the mining sector over the past decade have build what are now fully functioning mines, adding to the supply of bulk commodities in the world market. While demand is still strong, the fact that output (supply) has run faster and cost of production has fallen, it means the overall level of commodity prices is broadly flat.
The big issue rapidly unfolding for the Aussie dollar is the erosion of the gap between global interest rates and those prevailing in Australia.
Late payment times down nearly 10 percent
According to the latest analysis by illion, the average late payment time for an Australian business was 12.6 days during the September quarter, down 9.1 percent from 13.9 days during the prior corresponding period. In addition to reducing the length of time for overdue bills, the data shows more businesses are also settling their invoices on time, demonstrating a broad shift in payment behaviour.
“If a company’s annual report is like the yearly medical check-up, then payment data is like Fitbit data. Timely payments are a crucial sign of business health. They are critical to small businesses running on slim margins, reducing the risk of job cuts and business failures.”
Simon Bligh, illion CEO
"In line with the pickup in business expectations and a more positive tone in other parts of the business sector, the sharp fall in late payments reflects better economic conditions and a clear improvement in cash flows. Business cash flows have also been boosted by higher profits, as seen in illion’s latest Business Expectations survey, which means firms are able to make their payments to suppliers in a timelier manner."
Stephen Koukoulas illion Economic Adviser
The full report is at this link: https://dnb.com.au/_media/documents/AU%20Late%20Payments%20Q32017%20Full.pdf
This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2024247-032933611.html
Why the RBA is wrong, wrong, wrong
The latest Statement on Monetary Policy has confirmed the failure of the Reserve Bank of Australia to implement monetary policy settings that are consistent with its inflation target and objective of full employment.
It used to be the case that the RBA could never have a medium term forecast for inflation other than 2.5 per cent – the middle of its target range. The thinking was that if the RBA had a forecast an inflation rate of say, 1.5 or 3.5 per cent, that was based on current policy settings, it would adjust interest rates to ensure inflation would not reach those levels, and instead would return to the middle of the target.
The middle of the target range is an important goal for policy because it means the risks to the forecast are symmetrical. A forecast of, say 2 per cent, means that a 0.5 percentage point error could see inflation fall to a troublesome 1.5 per cent as much as it could rise to a perfectly acceptable 2.5 per cent, while a forecast of 2.5 per cent that turns out to be wrong by 0.5 per cent would still mean the RBA meets its target.
And even if the 2.5 per cent forecast turns out to be wrong as economic events unfold in ways not fully anticipated, it would adjust policy again to keep the focus on the 2.5 per cent. The RBA did this well until the global crisis came along and changed the growth, wage, inflation dynamics.
Which is where the recent RBA policy settings have been so wrong.
It has been well over a year since the last interest rate cut.