Our most anticipated outrageous predictions; the Australian Economic Outlook 2014. There is no question that 2013 has been a year of contrasts, changes and a great platform from which to build into 2014. As such, our forecast for 2014 is far more optimistic than at this point last year.
Generally speaking there is a higher level of optimism, the property market is back on the boil – at least it is in Sydney – and the stock market has put on some good weight. These all help in terms of lifting the overall “wealth effect” the feeling we have of our own personal circumstances and collectively, that of the nation.
So why this change and what does the year ahead have in store?
There are a variety of factors that have impacted on the Australian economy and while we shall look at them individually, they splice together in a web of interlinked ways that collectively influence our daily lives.
Last year we saw interest rates cut twice, for a total of 0.5% taking the RBA base rate to 2.5% – its lowest level since – well a long time ago – since pre 1959, when the Reserve Bank was formed, to be precise. At that time, by the way, the Everly Brothers were sitting at number one with “All I have to do is dream” – a lot has happened since then!
While there were only two cuts for the year, the real impact on the economy is still flowing through from the previous years’ 1.25% of cuts. With rates substantially lower, holding cash has certainly been less attractive for investors, and, as a result, that money has flowed into other asset classes.
Lower interest rates have also increased the consumers’ propensity to spend – afterall, with little return on savings, you may as well enjoy the money! This has been a great flow on and serendipity for the retail sector, easing what have been extraordinarily tough times.
With money effectively being driven out of cash, into other assets, a substantial amount of support is underpinning the economy and growth, with real assets – shares and property, in particular, likely to be the biggest beneficiaries.
The flip side of the looser money supply is that inflation continues to bite. Those most affected by this are fixed income earnings – principally those that are retired. Officially, the current inflation rate is around 2.4% – negating any interest earned. I also say officially, because anecdotally, inflation feels far higher.
Fuel prices have remained stubbornly high, irrespective of the Australian Dollar or indeed oil prices – neither of which seem to have any downward impact through the $1.40/litre level – and I am sure more Australians than ever before are looking to the discount coupon on their shopper docket for some respite.
A couple of months ago, my best friend was in town from New York. He lives on the Upper West side, and is an investment banker used to spending money and a frequent global traveller, he practically had a coronary when he shouted 4 takeaway coffees from my local, for $19! While we are the lucky country, luck is not cheap!
Clothing also remains a stubbornly expensive – a pair of ladies Asics Gel Kyano 19 – a serious pair of runners sits at $188 in the US – cheaper if you look hard – or $250 here in Australia. Assuming that there is a physical cost here, lets look at iTunes costs. Australian iTunes store start at $1.19 and top off at $2.19. However in the US, they range from US69c to US$1.29. I have no answer for you here.
Finally – lets look at vehicles – $65k will get you a decent BMW X5 in California – the same car in Australia is $160k – a big difference!! All of this though pales into insignificance – in Singapore $350k for the same!!
Now the reason for the above observations isn’t to have a crack about prices, it is to pose the conundrum; are wages driving costs, or costs driving wages? This is critical as we take a look at inflation in more detail.
Some inflation is important – gently rising prices are every Central Bankers’ goal, but rampant jumps up present their own series of problems. We believe moving into the New Year, that the full impact of the past 24 months of rate cuts will start to show up in inflation, and while this is a bonus for holders of shares and property, it is also a problem economically.
Two tier economies
There is much evidence of a growing two tier Australia – compounded by rampant salary rises in the mining sector and a runaway property market in Sydney, vs the day in and day out grind for the average Australian household. This is a political hot potato and one indulged by the previous administration. It is also an important factor for the current government to be mindful of.
Speaking of government
One of the major pluses for the Australian economy is the return of a majority office – a critical breakthrough. Minority government and the deals that are done to maintain office create a huge millstone on optimism – the past few years have seen so many policies introduced that have done little to support a strong economy, instead having the opposite.
Business and investor confidence has certainly improved post election and this is likely to be an ongoing driver in Australian Economic growth. Ultimately, markets and businesses alike want stability and the view on the Abbot government points toward that. Equally and in the same breath, markets are driven by sentiment first and foremost – again a positive tick and very welcome from my brokers perspective – speaking with clients who have now turned the corner in the optimism space.
China is not over and neither is the Mining Boom
Sydney Morning Herald – May 30th 2013
“The resources boom is over, sooner than anyone expected”
The Australian – October 24th 2013
“CHINA’s largest iron ore customer has told Trade Minister Andrew Robb in Shanghai the Australian mining boom is not over and demand for ore will remain strong.”
The notion of the mining boom being over was being touted around, six month ago – as you can see from the headlines above, the perception and popular opinion has changed! There is no question that the mining sector is slowing – it had to. In much the same way, the Chinese economy is slowing – it had to!!
How many countries in the Western world would give anything for that kind of growth? As China matures, in terms of its urbanisation, India remains very much in the wings – and all the while, the Australian Resources sector will continue to be a primary beneficiary of this.
How’s the Aussie scorecard?
So in terms of the score card for 2013 – a year of massive turnaround for sure but what do we have in store for 2014?
Our view is that interest rates are likely to remain relatively flat, for the next 6 months, as the impact of the previous cutting cycle are digested. That said, there may be one more cut in the pipeline in the pipeline. One source of frustration for many, has been that in spite of the cutting of rates, the Australian dollar has continued to trade in and around the parity level versus the greenback. This is likely to continue into the first half of the year, as much driven by the perception of the US economy and its health, as it is by that of our local economy.
Australian Economic Outlook 2014 – The facts and figures
Inflation is also likely to nudge higher – a level of 2.7% or above, will send alarm bells around the camp, although for share and property investors, wont represent a problem. This higher inflation would ordinarily be met by rate hikes, but given the current unemployment level is still above 5.5%, the RBA will be faced with a tough decision. Better would be a fall in unemployment, driven by business spending and investing, rather than government help. One area that we do foresee for the New Year is some topping out on wage pressures, so the time to ask for your pay rise is before Christmas!
ASX 200 2014 outlook
Against all of this backdrop, we continue to expect to see the Australian stock market push higher, fuelled by low interest rates, the search for yield by investors and organic economic growth. A move over 6000 is certainly not out of the question – and that is really only around 12% or so up on current levels. At the more optimistic end is an all out assault on the pre-GFC levels at 6500 again, something we believe is a real possibility.
Outrageous Market Predictions 2014
Our Free outrageous market predictions ebook 2014 pre-registration form which will include a bonus article.