It is that time of the year for the ‘year ahead’ predictions. 2016 will be an election year in Australia and the US, which always runs a huge risk for economic policy is, as in 2000 in the US and 2013 in Australia, nut jobs are elected and policy goes haywire.
For the economy and markets, the new year is kicking off in pretty good shape with global growth set to register another year of reasonable expansion, with Australia on track to kick ahead with a stronger year.
So here we go – in no particular order.
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.
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.
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.
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.
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.
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.
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 yearyields 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.
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.
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.
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.
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.
So there you go. Let the fun, and 2016, begin.