The economic case for trying something new

Guide

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

In this low growth environment, a ‘business as usual’ strategy won’t cut it

Macquarie’s global strategy team continues its long held view that global growth will remain lower for longer – as will interest rates – as the global economy continues its way through the ‘long grinding cycle.’

In fact, Macquarie’s latest Global Macro Outlook is calling the end of the past two years of negative momentum in global industrial production (IP), which likely bottomed in December 2015. Macquarie tracks global IP monthly, using data of the 69 leading industrial countries which account for about 93% of global IP. While no major trend reversal is forecast, the end of this deterioration trend is expected to be positive for sentiment.

This should translate to global growth of 2.4 per cent this year and improve to 2.7 per cent in 2017.

Where will global improvements come from?

Firstly the United States (US) and China account for 40 per cent of global IP, and both seem to have re-bounded since March.

Secondly, the Macquarie commodity team is of the view that commodity markets are no longer on an overall downward trend – in fact, for the first time in two years we have recently increased our demand forecasts across a number of commodities. We still need supply cuts across most commodities to bring inventories back to usual levels, but this is no longer a drag on global growth and investment by commodity producers will start to pick up as cash flows improve.

Lastly consumption and demand for services is the key to future global growth. Consumer confidence in the US remains at high levels and the benefit to household incomes from the weak oil price is still a positive. However recent growth in consumer confidence in the Eurozone may now soften as a result of the United Kingdom’s (UK) decision to leave the EU (Brexit).

Expect short-term volatility to continue

However, in the short term global financial markets will remain on edge for a couple of reasons. The UK’s vote to exit the EU was always going to be an event risk for markets and is having a short-term impact globally as there is a flight to safety. The protracted extraction process is likely to have an affect on consumer and business confidence, activity, jobs and growth for both the UK and Europe.

Then there’s the expectation that the US Central Bank will raise interest rates as the US economy improves. Macquarie forecasts a US rate rise as highly probable in December as inflation is rising and wages continue to grow driving consumer activity and confidence. This is despite recent softer US employment and business investment data.

Without the tailwinds of a strong economy to help drive growth, increasing business revenue will always be more challenging. Don’t underestimate the potential returns from innovating during the long grinding cycle.

Further rate cuts on the cards in Australia

Within the context of this global environment, Macquarie forecasts Australia’s growth at 2.3 per cent for 2016 and 2.5 per cent for 2017. However, the latest underlying inflation read of 1.7 per cent is outside the RBA’s preferred range of 2 to 3 per cent and has been driven by weak wages growth, and lower energy and food prices.

We expect inflation for the June quarter (released in July) to confirm this, which means it’s likely the RBA will cut interest rates again to 1.5 per cent in August.

Seeking opportunities in a low growth economy

In this low growth, low interest rate environment, a ‘business as usual’ strategy won’t cut it. Without the tailwinds of a strong economy to help drive growth, increasing business revenue will always be more challenging. However, these conditions should prompt business owners and managers to try something new (or, innovation by another name).

So what might that mean for you?

Often the simplest ideas can lead to quick wins once you’ve tested the response in the market – and this can lead to small but impactful (and potentially profitable) change.

New ideas could come from asking clients what would improve the way you service them, speaking to suppliers to learn what’s happening in your market place, or asking staff what are the road blocks, on a day to day basis, for doing a better (or more productive) job.

Innovation doesn’t have to involve a massive research and development project. It could be a more intuitive website, a new service or product package for adjacent markets, a new process or policy to make things easier for clients or more accessible technology to support your back office.

Don’t underestimate the potential returns from innovating during the long grinding cycle.

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