At the start of 2016, I posted my Top 11 tips for 2016. It has been a mixed bag with a couple of issues of timing and of course changes of view through the year taking their toll. Suffice to say, it was a borderline pass for the sum of all forecasts.
Outlined below are those 11 forecasts with my comments on their success of otherwise in brackets, in bold. Included is my self-rating out of 10 for each forecast.
1. Real GDP growth in Australia will accelerate to around 3.25 per cent, driven by strong exports, solid growth in household spending, a further lift in dwelling construction and a meaty contribution from public sector demand. Business investment will remain horribly weak, but even that might find a base during the course of the year. There seems precious little chance that GDP growth will slip below 2 per cent at any stage in 2016. [Well, against almost all expectations, annual GDP growth spiked to 3.3 per cent in the June quarter, before sling to 1.8 per cent in the September quarter. What looked a great forecast around September, ended the year looking not so hot. I jumped onto the slower growth band wagon around mid year when there were cleans signs of growth stagnation. My self rating is 6 out of 10]
2. This scenario should see the unemployment rate drift lower through the year. Unemployment should stay at 6 per cent or lower for the early part of the year and edge down towards 5.5 per cent later in the year. In this scenario, wages growth is likely to pick up a little, perhaps towards an annual pace of 3 per cent as the labour market tightens. [The unemployment rate fell to a low of 5.6 per cent around September/October before ticking up to 5.7 per cent in November. The unemployment rate forecast was pretty good. Wages, on the other hand, fell precipitously, to a record low of 1.9 per cent on the basis of some compositional shifts in the labour market, especially the trend to part time employment and rising underemployment. 4/10]
3. Inflation is a dead duck – at least for the near term. Australia is part of the global disinflation regime, although this is likely to change as commodity prices rise sharply through the course of the year, driven by a moderation in supply and a lift in demand. Underlying inflation will rise above 2.5 per cent in the latter part of 2016. [Generally a sound forecast – inflation is a dead duck, even though it has fallen further than the hard numerical forecast. I may have been a quarter or two premature looking at the link between the rise in commodity prices and the rise in consumer price inflation which appears to be lifting around the world. 7/10]
4. For monetary policy, the safe bet is the RBA will leave interest rates at the current 2.0 per cent for quite a while, meaning about the middle of the year. As the economy picks up steam, the focus of debate and market pricing will swing towards the timing of the first interest rate hike in the cycle. If, as seems likely, the unemployment rate edged down a little more and inflation edged up, the rate hiking cycle should start to be priced into the market during the June quarter. That would be my trade recommendation on the expectation that the cash rate will end 2016 at 2.5 per cent. [Wrong. The RBA cut rates on the back of the unexpected fall in inflation and moderate rate of growth. I was stopped out of the trade around May when I switched to the rate cut scenario. That said, it was a shocker! 0/10]
5. Commodity prices are set for a powerful lift, albeit from currently low levels as production cuts and mine closures undermine supply. Iron ore could easily reach US$60 a tonne, with oil back above US$50 a barrel on the back of these trends. I note that not all commodities will benefit – coal is in a long run secular decline and the industry needs to prepare for entrenched low prices. A declining proportion of global energy output is from coal which means its price is doomed. Gold to remain unattractive. [An almost perfect forecast, with the partial exception of coal. The iron ore price has doubled, oil is well above US$50 a barrel, other metals prices have surged, with the exception of gold which has crashed, as expected. 9/10]
6. The Aussie dollar looks set to move higher. It is possible, if not likely, the AUD will hit US0.80 at some stage during the year, although there are likely to be smaller gains on the cross rates, especially the Euro, which seems set to recover in like with the more positive tone to the economic performance of the Eurozone. [With the forecast set when the Aussie dollar was around 0.7200 and the strong consensus focusing on a drop into the 0.60s, the AUD hit a high of 0.7835. Since then, with the change in outlook for interest rates domestically and prospects for higher rates in the US, the AUD range traded around 0.73 to 0.77 until the final few weeks of 2016. Only in the last few days has it dropped to around 0.7200. The AUD has been firm against the Euro. 7/10]
7. Perhaps the easiest forecast to make is a rise in government bond yields. It would not be at all surprising if we see 3 year yields in Australia spike above 3 per cent, the 10s approaching 4 per cent and the 20 year exceeding 4 per cent on a sustained basis. The inflation outlook, global trend and change in policy biases from the RBA will drive this bear market. The risk is yields end the year even higher than the scenario painted above. [Generally wrong for the first 8 or so months of the year, government bond yields fell to near record lows but in recent times have spiked alarming to end the year at a similar yields to where they started the year – 10 year yields are at 2.8 per cent. The market sell off was both late and not as extreme as expected. Maybe this is the 2017 trade? 2/10]
8. Australian stocks should have a corker of a year. Held back by the resources sector and fears of a house price crash, the ASX has been a dog for a few years. This should change given the enhanced outlook for growth and commodity markets. The ASX200 at 6,000 seems conservative. [A great call – for 2016, the ASX had a gain of about 7 per cent plus 4.5 per cent dividend yield. The commodity price boom has underpinned stunning gains in resources stocks and even though the market has fallen a little short of the 6,000+ target, being long the ASX has paid very well. 9/10]
9. House prices will edge lower. The drying up of investor demand, the likely lift in mortgage interest rates and the improved outlook for the stock market will drive people away from houses. Most likely is a price fall of 5 to 10 per cent with the weakest areas being Melbourne and Sydney, with Canberra and Perth also set for some price weakness. These sort of falls will excite some on the expectation of a US, UK, Ireland type crash, but the solid jobs market will means such a gloomy scenario is extremely unlikely. [Generally wrong – while house price growth has slowed, price falls have been concentrated in Perth and Darwin. Melbourne and Sydney remain buoyant, fuelled by interest rate cuts (that poor forecast permeated through a range of other forecasts) and a slow supply side response. Again, it looks like the call will be better suited to 2017. 3/10]
10. Hilary Clinton will win the US Presidential election meaning the US has some bias towards pro-growth, progressive policies that will help to support economic conditions in the US and the world. [Wrong on politics right on pro-growth policy outcome, or so it seems. 2/10]
11. Malcolm Turnbull will win the Australian election, but not by much. My guess is that the Coalition Parties will win 78 seats, Labor 67 and a hotch-potch of others 5 seats. Part of the reason for the win will be the revelation in PEFO that the year for the budget surplus is 3 years earlier than assumed in MYEFO on the back of the stronger economy and commodity price rebound. [Turnbull fell across the line in the July poll – reasons for the win do appear linked to perceptions of economic management even though the budget bottom line has continued to blow out from the budget, to PEFO to MYEFO. 7/10]
Bring on 2017!