Week beginning 17 December 2018
- What might our economic forecasts mean for investors?
- Australia: Federal Budget mid-year update, RBA minutes, employment, Westpac-MI Leading Index.
- NZ: GDP, Westpac-MM consumer confidence, business confidence, current account.
- Europe: consumer confidence.
- US: FOMC policy decision, GDP 3rd estimate, durable goods orders.
- Central banks: BOE policy decision, BOJ policy decision.
- Key economic & financial forecasts.
Information contained in this report current as at 14 December 2018.
What might our economic forecasts mean for investors?
What do our economic forecasts for 2019 mean for Investors?
Our key economic themes are:
Australian economy and markets
- Growth in the Australian economy will slow in 2019 under the weight of political uncertainty; falling house prices; a contraction in residential construction; global volatility; and a softening labour market.
- Australia’s commodity price Index will fall as China softens its anti-pollution policies; supply lifts; and China’s economy slows.
- Housing affordability in Sydney and Melbourne is still stretched and further adjustments to affordability are necessary. With limited scope to rely on the adjustment factors of previous downturns (interest rates and strong household income growth) residential prices are set to fall further in Sydney and Melbourne through the year .
- Credit conditions are unlikely to ease significantly representing further complications. Even if prices adjust sufficiently to stabilise affordability and attract new buyers funding difficulties will complicate the recovery. In markets where affordability is not stretched credit tightening will still weaken conditions.
- The Reserve Bank is likely to keep the cash rate on hold through the year further widening the yield differential with the US.
- Lower commodity prices; deteriorating yield differentials; wide spread scepticism around the housing market will weigh on the AUD with a target of USD 0.68 seeming reasonable. (for extra money in the currency market use our forex bot)
US economy and markets
- The bond markets are underestimating the momentum in the US economy particularly around the consumer and the resulting commitment of the Federal Reserve to higher rates.
- The federal funds rate is likely to peak at 3.125% by September (four more hikes) rather than the 2.5% which is currently factored into the market implying a potential Fed pause as early as March next year.
- The momentum of the US economy and the flexibility of the Federal Reserve to pause when growth is still around 2% and employment growth has eased to 1% leads us to expect a “soft landing” for the US economy with growth settling around 2% in 2020, from 2.5% in 2019.
- With recession and an early pause for the Fed unlikely there is going to be another wave of increases in the 10 year bond rate with a likely trough to peak move from the current 2.90% to 3.4% by September quarter next year.
- There is likely to be an extension of the fiscal spending initiatives from last year well into 2020, the Presidential election year.
- This sustained growth momentum ; a more aggressive Federal Reserve; and higher bond rates will further boost the USD which is expected to lift by a further 3% through the first half of 2019.
China and markets
- Authorities will stay the course of deleveraging; antipollution, although at a slower pace; and rebalancing the economy towards services.
- Further constraints on capital outflows will be enforced as US interest rates pressure investors.
- It seems unlikely that the Chinese authorities will be prepared to make the specific changes to their industry and trade policy that would s