A little over six months into the year, I am doing what almost no other economist does and present a scorecard on my forecasts for 2016. The record is mixed – some big wins, some big errors.
On 1 January 2016, I had my Top 11 tips for the year for economics, politics and markets. Those forecasts are reproduced below, with my assessment of how those forecasts are travelling in bold.
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. [This forecast is looking quite good although there are some headwinds for GDP in the second half of the year. A reasonably good forecast.]
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. [A mixed result. It is encouraging to see the unemployment rate below 6 per cent shich is the good aspect of the forecast, but wages growth has slumped to never before seen lows. That is a miss.]
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. [So far so good. Inflation has fallen sharply over the first half of 2016. The test of this forecast will be whether inflation picks up in the second half of the year. Very pleased with commodity price forecast.]
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! Big time. The RBA has obviously cut interest rates and seems set to cut some more in the next few months. I gave too little weight to the importance of falling inflation in the first half of the year for monetary policy considerations.]
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. [Very pleased with these forecasts even allowing for the small pop in gold and coal.]
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. [Delighted with this call, especially when the consensus was for the AUD to be skewed below US0.70.]
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. [Dreadful forecast. The error is linked to the call in monetary policy both domestically and globally. Government bond yields have plunged to record lows. An easy forecast? Yes. Wrong? Yes.]
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. [Looking solid with the ASX around 5,500 and looking poised to move higher. It’s been good to be overweight ASX since the start of the year so a solid call.]
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. [Not a bad forecast at this stage – the pace of house price growth has slowed. House prices did fall in the March quarter but may have moved higher in the June quarter. Need to see how prices go over the rest of the year to be sure.]
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. [Too early to tell, but Clinton is a hot favourite to win.]
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. [Great call on election result, although the key reason is wrong even though the Coalition campaigned hard on “jobs and growth”.]
All up, it is a mixed bag half way through the year with some reasonable outcomes for growth, unemployment, inflation, the Aussie dollar, commodity prices ,stocks and politics, but dreadful misses on monetary policy and as a result, bond yields.
Will update in about six months to see how it all ended up.