Economic Outlook

The global economy looks strong for the next year but different risk factors may affect consumer and business confidence.

Market outlook for the next financial year

Generally, for Australia, it is expected that interest rates will remain steady and wage growth will remain weak, albeit strengthening slightly. Property prices will continue their correction, but without crashing and unemployment will remain low.

Global economic outlook

Global economic growth looks set to continue, with both business and consumer confidence holding up despite volatility at the start of the year. One risk is whether the Trump Administration, through new sanctions or threats on trade, upsets investor confidence. This occurred earlier this year in the tit-for-tat imposition of tariffs on imports between the US and China. Another risk is the prospect of the Federal Reserve hiking interest rates too quickly.

Australian economic outlook

Economic growth

The Reserve Bank of Australia (RBA) has forecast that the economy will grow more this year than in 2017. Upside surprises include a surge in commodity prices if China grows faster than expected. This is less likely given China’s efforts to curb excessive investment and construction. However, disruptions to global growth, where our commodities such as steel and coal are key components, could see our economy struggle.

Wage growth

The unemployment rate is at a low 5.5 per cent. However, the underemployment rate remains high indicating there are many people who would work more hours if they could. Until that starts to drop more, wage growth is likely to remain weak.

Inflation

It’s likely that inflation will remain at or below the lower end of the RBA target rate of 2-3 per cent given the likelihood of limited wage growth.

Interest rates

Not only is wage inflation weak but households are heavily geared. Until the RBA sees wage growth helping to erode this debt we are unlikely to see interest rates move higher.

Unemployment

We should expect to see the unemployment rate fall, given the positive outlook for economic growth. However, this must be balanced against the weak level of consumer demand.

Property market

There has been weaker growth in Melbourne and price declines in Sydney in recent months. This is continuing to play out but an outright crash is unlikely for two reasons. The first is the ongoing immigration intake, approximately 200,000 people last year, which supports housing demand. Secondly, policymakers are incentivised to prevent declining prices given how much Australian household wealth and bank lending is concentrated in property.

Outlook for Australian shares

The Australian market is positioned to perform well, but will likely underperform international shares. Bank stocks account for a large portion of the Australian share market and given the risk of additional regulations this could hamper profits. High household debt also restricts the ability of banks to grow revenue and hence profits. Natural resources (metals, oil and gas) account for almost a third of the Australian market. While commodity prices have risen thanks to rising global economic growth, they are unlikely to boom.

Taken together it’s likely to be a positive year overall but not an especially strong one.

Source: IOOF

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