2016: the unexpected year

Market insights

Martin Lakos
Thursday 15 December 2016

Outcomes have been mixed, but 2017 looks positive

Those in the prediction game, such as pollsters and betting agencies, will be very glad to see the end of 2016.

But has it really been such a bad year?

Even global financial markets got it wrong in the early part of the year, as volatility increased in January and February following deep concerns about a major slowing of the Chinese economy, with implications for global growth.

These concerns were real, but did not materialise as Chinese authorities managed relatively stable growth of around 6.5%, by having both the financial capacity and a long term plan to do so. An unexpectedly good outcome!

The US economy started the year a bit softer, a flow-on effect from 2015. Interest rate increases failed to materialise and so, with prolonged low interest rates, consumer demand picked up and was also aided by a weak oil price. Corporate profitability was maintained, driving investment, employment and wages growth; and housing construction is set to support economic activity in 2017.

With momentum gaining and inflation picking up, it’s no wonder the US central bank has recently raised interest rates and will probably do so twice more in 2017. Nothing unexpected here!

The most unexpected event in 2016 was the Brexit vote outcome, followed by the US election.

For the UK, the extraction from the EU will be complex as the plan and execution of it will see consumer and business confidence wax and wane.

However, what was unexpected was the quick rebound in financial markets within days of the Brexit vote. This was driven by swift action by the Bank of England and the immediate 10% fall in the value of the pound, making UK services (nearly 70% of the economy) and exports immediately 10% cheaper.  The currency has since weakened further, supporting growth albeit at a slower pace and the UK economy is unlikely to fall into a recession.

With this global back-drop, the Australian economy has probably performed in line with expectations, but with a very mixed set of outcomes.

Interest rates were cut twice to an historic low of 1.5% as inflation dropped below the RBA’s preferred range of 2 to 3% and an elevated Australian dollar was no longer as supportive. Business investment has been elusive, wages growth slowed as did consumer demand, yet unemployment has been stable. Apartment construction has dominated housing activity and an expected over-supply will see prices cool; but a pick-up in the renovations cycle is likely to partially replenish the construction pipeline.

The recent drop in economic growth (GDP) for the September quarter was anticipated – just not the extent of it. The mining investment boom is paying off as record volumes of iron ore and energy has supported growth and now commodity prices are up 30% from their lows, our national income will improve going in to this December quarter. 

What can we expect for 2017?

Macquarie predicts growth will recover into the second half of 2017.

Our 25-year record of uninterrupted growth will remain intact, as higher commodity prices make a positive impact, planned infrastructure construction will have commenced, and business investment will improve.

As sentiment towards employment security improves, consumer activity should pick up. With this momentum we forecast growth in 2018 to be 2.8%.

Without inflation bouncing back above 2% in the near term and the prospect of a stubbornly firm Australian dollar, we predict the RBA will cut interest rates in February and again in May, taking the cash rate to the historically low 1%.

Macquarie's theme of the long grinding cycle continues, lower growth for longer...nothing unexpected about that!

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