What a difference a year makes

Report

Martin Lakos
Thursday 18 May 2017

Economic risks are easing

About this time last year global financial markets started to recover from a very shaky start to 2016, as concerns on the direction of global growth abated. Earlier expectations of a China slowdown, deflation in Europe, Japan in need of more than Abenomics to reverse its slump and faltering US economic growth momentum were blamed.

Here in Australia, flagging business and consumer confidence was impacting business investment and consumer activity and the September quarter growth number was a negative: could it be possible that our 25 year run of growth was over?

China did not slow, inflation stopped declining in Europe and growth started to move upwards; and the US did not falter. Signs that synchronised global growth was emerging started in June last year but didn’t really get confirmed until the low had passed.

Suddenly our national income is rising, so much so that the largest trade surplus since 1971 was reported last December.

Global leading indicators in services, manufacturing and construction sectors were by then already turning up and then came the confidence boost no one was expecting: Donald Trump won the US election.

US growth and inflation are now being put in check as the US central bank finally commits to higher interest rates. This is not something to be concerned with; rather it’s a sign of the sustainability of the US recovery.

Commodities particularly iron ore and energy, started to recover from what was thought to be the start of a long drawn out cyclical low. They have since exceeded all forecasts, with iron ore nearly touching US$100 a tonne and oil recovered from a low of US$29 a barrel to US$50 a barrel.

The impact of this cannot be under-estimated. Australia was (and still is) exporting record volumes of iron ore, but at lower prices. Suddenly our national income is rising, so much so that the largest trade surplus since 1971 was reported last December. Construction has been steadily rising, both from planned infrastructure spend and residential property demand, with higher density apartment living a clear driver.

The latest set of data here has shown underlying inflation modestly recover to 1.8% in the March 2017 quarter from 1.5% in late 2016. Unemployment remains unchanged at 5.9% but jobs growth has been improving, particularly total hours worked over the past two quarters.

More recently, economists have been forced to upgrade their growth forecasts for 2017 and 2018 for Australia, only to be gazumped by the International Monetary Fund (IMF) upgrading its growth outlook to 3.1% for 2017 along with an upgrade to global growth to 3.5%.

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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.