It’s that time of the year – making the calls for the year ahead for the economy and financial markets.
Key themes:
Ongoing sluggish growth in Australia with house prices set to weaken markedly, possibly fall. US (and most global) stock markets to fall, perhaps quite sharply. US dollar to weaken, Euro to rise strongly, linked to a reversal to the current market over reaction to US politics. The moves have been irrational. RBA to cut interest rates, bond yields to have only a limited sell off.
Without further ado, here are the Top 10 on the economy and markets, plus a couple on sport and horse racing.
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.
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.
3. The Australian dollar
Interest rate cuts locally and pull back in commodity prices should be negative for the AUD, but with the USD also likely to weaken, the AUD may only fall to US$0.68 to US$0.70 before finding favour and ending 2017 nearer 0.75 than 0.65. More likely and the best trades, the AUD will weaken against a resurgent EUR (target 0.6250), CAD (0.93) and NZD (0.98). Any confirmation of a credit rating downgrade, with related policy shortcomings will help to undermine the AUD.
4. Monetary policy and bond yields
The RBA to cut interest rates to 1 per cent with low inflation and weak growth the key factors. A reversal in the recent terms of trade gains will help fit the rate cut scenario. Bond yields, which has sold off sharply since the middle of 2016, may weaken a little more – Australian 10 year yields could well end 2017 little changed around 2.75 per cent, but might test 3.5 per cent in the early part of the year.
5. GDP Growth
The economy is likely to muddle along – real GDP growth will bobble around 2 per cent right through 2017. A few hints of optimism will be dashed with bouts of pessimism. Consumer demand will remain soggy, business investment will keep falling and from around the middle of 2017, dwelling investment will fall sharply through the year. Exports will help to underpin growth, as will strong government spending.
6. Labour market
The economy will not create the jobs needed to drive the unemployment rate lower or to fuel a much needed pick up in wages. The unemployment rate is set to end 2017 higher than in 2016 at 6 per cent, perhaps a little more. Wages growth will remain low at around 2 per cent, with risks that it will drop to 1.75 per cent. The bias to part time employment is likely to continue meaning that hours worked and household income growth will be constrained.
7. Inflation
Inflation will edge up from the record lows of 2016, but is unlikely to break above the mid point of the RBA 2 to 3 per cent target range. More likely, underlying inflation will spend most of 2017 around 2 per cent with a slight uptick to 2.25 per cent by year end. The recent commodity price spike may impact headline inflation over the next couple of quarters.
8. The Budget
The budget numbers will remain problematic, so much so that the triple-A credit rating from all three major agencies will be lost. The deficit for 2017-18 will be close to $25 billion with high government spending and soggy revenue holding back any narrowing. During 2017, gross government debt will exceed half a trillion dollars for the first time. The government may get some benefit from an upgrade to its very gloomy commodity price forecasts presented in MYEFO.
9. Commodity prices
Watch for a moderate pull back after the stellar run of 2016. Good old fashion supply and demand mean oil is likely to head back to US$40 a barrel, iron ore US$60 a tonne, Coal will drop very sharply, by around 50 per cent, as a glut of production unfolds. Gold which has been a dog, may find a few friends at these lower levels and could be a shining light amid the general weakness – maybe US$1,300 an ounce.
10. House prices
The glut of property will be felt and overall price growth will stall. This, of course, means there will be a few pockets of weakness and prices fall, but with interest rates low and underlying demand strongly supported by a likely 350,000 people in Australia during the year, any price weakness will be moderate. Plenty will be written about this during the year.
11. Sport and horse racing
Collingwood and South Sydney to win respective premierships at big odds: A horse called We Have Lift Off wins for quality races through the year and Hotel Amour shows staying potential with a couple of quality runs as a 3 year old.
Overall:
In my view, to use the market parlance, sell stocks – especially in the US and UK, sell the US dollar and sell commodities with bond yields set to tread water. But do your own thinking before following any of the above forecasts. They are not a recommendation for trading and see you finanical advisor before investing your hard earned.
