Economic déjà vu for 2016


That was the year that was

Just for a moment, transport yourself to December 2016. You may experience a certain feeling of déjà vu – that 2016 unfolded just like 2015.

Without a crystal ball I can't predict exactly what 2016 has in store for us from an economic and share market perspective.

However Macquarie's global economics and strategy research team has described the global outlook as continuing the "long grinding cycle". That is: low growth and inflation, anaemic business and consumer confidence, range bound share markets and further currency depreciation (which is assisting exports).

Sound familiar?

So how did 2015 actually shape up, and will we experience more of the same in 2016?

Developed world economies have been supported by very low interest rates, plenty of liquidity and, for those whose budgets allow, government investment in infrastructure.

Globally, the US economy has gained momentum with growth at 2.5 per cent and unemployment at 5 per cent, strengthened residential construction, and strong services activity supported by zero interest rates. Although that is likely to change if the US central bank embarks on measured interest rate increases in mid December.

Europe has weathered the Greek debt crisis and green shoots are emerging with growth at 1 per cent. Exports are a key driver, benefitting from the weakening Euro currency, and what’s more two members of the PIIGS group (Portugal, Italy, Ireland, Greece and Spain) are seeing real benefits from their austerity measures.

Ireland grew last quarter at a 6 per cent clip compared to the same quarter in 2014, and Spain ­­­–with its broad and deep industrialised economy is also improving.

Meanwhile, the UK is Europe’s star performer, and is now growing at 2.25 per cent.

In Asia, Japan has structural issues, but growth and inflationary data are improving. And while the global markets remain infatuated with China's growth and fear a hard landing (with subsequent market volatility through August and September), significant declines haven't emerged. It’s Macquarie's view they aren't likely to.

Chinese authorities are managing this huge economy's transition towards a growing middle class with disposable income by deploying a range of stimulatory measures, and that’s allowing them to defend annual growth at the 7 per cent level.

For Australia’s economy, 2015 will be viewed as a year of adjustment and stability.

Annual growth was in the 2 to 2.5 per cent range, below the long-term trend of 3.25 per cent. Inflation is at the lower end of the 1.5 to 2 per cent range, and business confidence has modestly improved. While consumer confidence has waxed and waned, 18 of the last 20 surveys remain just below the 100 level – indicating there is still caution.

However, business investment has been elusive for most of 2015. This seems to be more an issue of confidence as Australian companies have balance sheet capacity to invest. It’s possible the change of the federal government leadership and the new rhetoric of innovation and investment may build confidence to do so in 2016.

Our currency depreciation is now bearing fruit as Australia’s non-mining sectors grow. Having started 2015 at US$0.8886, the Australian dollar has seen a significant adjustment, depreciating 19 per cent to US$0.72. Employment growth in tourism, education and services has been the stand out result, and the Reserve Bank has been patiently watching the currency do the work of re-balancing our economy.

For Australia’s economy, 2015 will be viewed as a year of adjustment and stability. 

So, onwards to 2016.

Economists want an each way bet. We can expect more of the same, but with a more positive tilt towards the second half – and with some caveats.

The pre-conditions for a cyclical upturn in the Australian economy are for the currency to depreciate further towards US$0.65. We also need to see non-mining sectors accelerate to balance out the declining contribution to the economy by the mining sector. And a marked turnaround in business confidence (and investment) is essential – a positive impact on wages will give consumers a confidence boost.

2016 will also be a year of political campaigning, as both Australia and the US have elections. Our economic year may also be shaped by the way US interest rate rises are carried out, and how the European and Japanese central banks continue pump priming their economies. From China’s stimulatory activity to the impact of el Niño, global activity will continue to influence the Australian economy.

Indeed, it may not be a déjà vu experience, but something more like ‘le meme mais different' – same same but different!

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