A more favourable economic forecast

Report

Martin Lakos, Division Director, Macquarie Private Wealth
Thursday 01 December 2016

We believe global economies should actually do quite well this year, however you can't just sit back and hope economic growth will pull you through.

Market volatility earlier this year resulted in predictions of continuing poor economic performance around the world. While I admit the environment isn't as good as it could be, Macquarie is forecasting overall positive growth of 2.8 per cent across global economies, with record low oil prices potentially pushing global GDP up in 2017.

What's interesting is where that growth will come from.

Macquarie is forecasting overall positive growth of 2.8 per cent across global economies

The United States (US) economy has some momentum, with forecast growth of 2.5 per cent. Unemployment has dropped from 10 per cent to just under 5 per cent in recent years, and we're seeing wages rise across the board. A 12-year low on oil prices is giving the average US consumer an extra dollar per gallon in their back pocket. Innovation and technology developments have also boosted productivity.

The combination of these four factors means it's likely we'll see a further increase in consumer confidence and spending.

In China, we're confident in Gross Domestic Product (GDP) growth of 6.7 per cent in 2016-17 as the middle class continues to burgeon. Services and consumption is now half the economy and now growing at 10 per cent.  The nation's economy has grown from $US1.7 trillion in 2000 to $US11 trillion today, so it's no wonder Chinese authorities are now seeking some stability.

We also expect to see the Indian economy grow the most over the next year, at 7.5 per cent. This is largely due to the predicted growth in its population, seeing it overtake China by 2025. There are many structural and bureaucratic issues to overcome, and this is an area where Australian businesses can provide expertise and guidance as the economy develops over the next five to ten years.

In Japan, a switch from a zero interest rate policy to a negative interest rate policy, forcing commercial banks to lend. Hopefully this will be reinvested back into the economy.

The European Union (EU) will continue its rise from the ashes with growth at 1.6 per cent as the economy benefits from a weak currency and subsequent exports, and a €60billion stimulus every month.

 

Light at the end of the tunnel

So what does that mean for us in Australia? While we need to be prepared to operate in a low growth economy, there are still opportunities for the taking.

Many economists were surprised by the latest GDP forecasts of 3 per cent. Unemployment of 5.7 per cent suggests an improving labour market. The low dollar is helping our export industry and services, including tourism, education, health, property and financial services, which have now overtaken resources as our best performing exports.

We should also start to see an increase in domestic spending. As job security confidence modestly increases, we expect to see a shift away from paying down the mortgage or boosting savings. Meanwhile the domestic property market is likely to soften as supply catches up with demand and actually may even overtake it for a while.

We can also look to our close neighbours in Indonesia, who are expecting a 5.5 per cent growth, for collaboration opportunities now that relations between the two nations are mostly back to normal.

While we need to be prepared to operate in a low growth economy, there are still opportunities for the taking

 

This is not the time for businesses to stand still

Given the fairly flat yet positive conditions, now is the time for businesses to back themselves. We're seeing a gap between business conditions and business confidence, but there are early signs many are positioning for growth. Both the NAB hiring intentions index and Seek job ads numbers indicate employment levels are likely to rise.

Across most industries we've seen a faster rate of depreciation of capital goods than the rate of investment, but anecdotal evidence from Macquarie's leasing team indicates businesses are also starting to invest in plant and equipment again.

These are both very early precursors to growing business investment confidence.

 

The innovation dividend

One thing the markets consistently reward is innovation. We only have to look at the impact on Apple's share price, as an example, each time it launches a new game changing product.

In one recent study1, Australian small and medium enterprises (SMEs) that introduced a new product or a new method into the workplace raised productivity by 5 per cent. But when they combined that innovation with collaboration, they raised productivity by 12 per cent.

It's clear we can no longer expect to ride the economic wave to profitable growth. But the market conditions are favourable if you're ready to make the next opportunity count.

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This material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.

1 Source: Centre for Transformative Innovation, Swinburne University of Technology

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