By Craig James

Year in review: 2015

The year is best summed up by the Reserve Bank Governor. In testimony delivered in September, Glenn Stevens noted that the economy was growing, “but not as fast as we would like.” Still, indicators released late in the year provide promise that economic momentum is lifting, with the hope that this will be carried through into 2016.

The economy probably grew around 2.25 per cent in 2015, down from the decade average of 2.8 per cent. In the September quarter the economy was 2.5 per cent higher than a year ago.

The annual inflation rate stands at 1.5 per cent. But once volatile factors are removed, underlying inflation is around 2.25 per cent.

The unemployment rate stands at 5.8 per cent, down from 6.1 per cent at the end of 2014. In the year to November, 344,200 jobs were created – the most in almost eight years.

Wages grew by 2.26 per cent in the year to September, a record (18-year) low.

The Federal Government now expects a budget deficit of $37.4 billion in 2015/16 (2.3 per cent of GDP), up from the earlier estimate of $35.1 billion.

Australia’s population grew by 1.35 per cent in the year to June, the slowest annual rate in nine years.

Retail trade rose by 3.9 per cent in the year to October, above the 5-year average of 3.7 per cent.

Consumer confidence and business confidence and conditions are holding above long-term averages.

Annual new car sales and building approvals are both holding at record highs.

Australian home prices probably grew by 8.5 per cent in 2015 after lifting by 7.9 per cent in 2014.

The Reserve Bank cut the cash rate by 25 basis points (quarter of a per cent) in both February and May. The cash rate stands at 2.00 per cent.

The Aussie dollar started the year at US82 cents and is ending 2015 just above US72 cents.

The Australian sharemarket (ASX 200) may end 2015 down around 4.5 per cent (All Ordinaries down around 3.0 per cent). The US Dow Jones will probably end lower by around 2 per cent.

The global economy probably grew by 3.1 per cent in 2015, below the 40-year average of 3.5 per cent.

The US Federal Reserve lifted interest rates in December for the first time in almost a decade.


The year ahead: 2016

Global Economy: The International Monetary Fund tips global economic growth to lift from 3.1 per cent in 2015 to 3.6 per cent in 2016.

United States: The US economy is on more solid ground. But with inflation still low, the Federal Reserve won’t be in a rush to lift interest rates. We expect the Fed to raise rates three times over 2016. Employment and inflation trends will determine the timing of rate rises.

China: The transition from production to consumption continues. However just as the strength of demand for raw materials surprised many (especially miners) from 2007-2009, the strength of Chinese consumer spending could surprise over the next few years. The economy will likely grow between 6.5-7.0 per cent over 2016 and China will still contribute around a quarter of global economic growth.

Europe & Japan: Constrained by flat/negative population growth and deflationary forces, European and Japanese economies are likely to face ongoing challenges in 2016.

Oil producers: The countries to watch are the major oil producers. While oil production is economic even at current low prices, government budgets of the major producers remain under pressure.

Australia: We expect economic growth in a 2.50-3.00 per cent range in 2016, suggesting a move to near “normal” economic growth. Inflation should hold between 2.0-3.0 per cent, with a narrower 2.00-2.50 per cent range seen as likely. Unemployment should consolidate between 5.50-6.00 per cent with potential to move towards 5.50 per cent as economic growth picks up pace. 

Australian dollar: Last year we noted: “Over the past 20 years, the Aussie dollar has, on average, tracked in a US13.7 cent range. If normal volatility persists in 2015, then a range of US71-85c could be assumed.” The actual range was US68.93c to US82.95c. We currently see the risk of the Aussie dollar falling to US65 cents early in 2016 and ending the year around US70 cents. Using the same methodology as last year, a possible range for the Aussie dollar would be US63-77 cents.

Interest rates: Over 2015, the cash rate has averaged 2.11 per cent – a record low. We expect the cash rate to remain unchanged at 2.00 per cent in 2016 with inflationary pressures well contained. A likely range for the cash rate in 2015 is 1.75-2.25 per cent. The Reserve Bank currently maintains an “easing bias”. In other words, should the economy falter, rates could be cut further.

Sharemarket: In 2015, almost everything that could go wrong for sharemarket investors did go wrong. Commodity prices slumped, especially oil and gold. The Chinese sharemarket soared then slumped. Investors were surprised by a devaluation of the Chinese Yuan. The US Federal Reserve delayed hiking interest rates. And global and domestic economic growth disappointed.

In 2016 the sharemarket will continue to experience headwinds. Iron ore and oil prices are expected to remain low; there is likely to be ongoing uncertainty about US rate hikes; transition of the Chinese economy will continue; and domestic economic growth will only gradually lift back to more “normal” growth rates. The All Ordinaries is expected to end 2016 between 5,500-5,700 points. Over the past two years, we, like other forecasters such as the Reserve Bank have been too optimistic. We have adopted more conservative forecasts this year, acknowledging that downside risks still tend to dominate.

The key risks for Australian investors in 2016 are ongoing softness of commodity prices; a perception that Australia is an ‘old economy, relying on commodities; disinflationary tendencies across the globe; risk of a ‘hard landing’ in China; US interest rate uncertainty.

 

Housing: Growth of home prices will ease to the 2-5% range over 2015 as more homes are built and add to market supply. Slower population growth and increased supply will be balanced by ongoing low interest rates.