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GLOBAL ECONOMIC OUTLOOK
SHOW ME THE WAY
Stephen Halmarick
Head of Economic and Market Research
Colonial First State Global Asset Management
Adviser Use Only
Disclaimer
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Markets: A wild ride
The start of monetary policy
normalisation in the US was always
going to be a challenge for markets
Monetary policy among major central
banks now diverging
Concerns over China slowdown
But this is an equity market event –
not GFC Mark II
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US: The Fed’s report card, lift off coming
US unemployment rate was
5.3% as at July 2015
(August data due tonight)
Enough to meet the “some
further improvement”
requirement for a September
rate hike
Fed expects to reach fullemployment projection of
5% this year
Inflation 1.2% for Core PCE
– Fed expects a steady rise
in coming years
Further declines in oil and
commodity prices could
delay the Fed
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US: Fed funds rate and bond yields
Bond market continues to under-price
expected Fed rate profile
Fed guiding the market to the first
rate hike before year-end 2015
Vice-Chair Fischer says September still
open – rate decision is finely balanced
Boston Fed President suggests going in
September – but emphasising caution
Expect some upward movement in bond
yields
But gradual nature of tightening could
limit extent of bond sell-off
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Adviser Use Only
China: Three challenges
China has three challenges:
1.
A slowing economy
2.
Equity market volatility
3.
Capital outflow and currency
depreciation
Chinese Premier Li once
remarked that China’s GDP data
was ‘man made’; He preferred to
look at the change in bank
lending, rail freight, and
electricity consumption
This clearly shows a slowing
economy. But job creation
remains strong – 10m+ per year
Average GDP growth of 6.5%
required to reach goal of
doubling China’s real GDP by
2020
Further stimulus measures will be
needed
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Adviser Use Only
China: Asset market volatility
Chinese equity markets
have traded with volatility
due to margin financing,
valuations and changing
regulation
But the impact on the real
economy should be limited
Authorities unlikely to focus
too much on the level of the
equity market
Property markets are
recovering
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Adviser Use Only
China: A range of easing measures have been deployed
Chinese financial
conditions remain tight
despite recent devaluation,
interest rate cuts and RRR
cuts
Expect more stimulus to
come to boost growth
One off devaluation aimed
at improving exchange
flexibility, but also to preempt Fed moves and help
weakening export sector
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Europe and Japan: More stimulus coming
Both the US Fed and Bank of England
have finished QE
Bank of Japan accelerated its QQE
program in October 2014 and likely
to do more
ECB sovereign bond QE started
March 2015 at €60bn a month
Will continue to at least September
2016 or when inflation is forecast at
2%
Total amount of central bank liquidity
will continue to rise
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EU: Growth starting to improve, but significant divergence
Signs of some economic
improvement
Unemployment rates now
falling
Less fiscal austerity, weaker
EUR and more stability in
banking system is helping
Headline Eurozone growth
hides significant divergence
between countries
Ireland and Spain, early
adopters of economic
reform, now leading growth
Greece a clear area of
ongoing concern, elections
on 20 September
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Australia: Economic growth rate below trend and income growth flat
Q2 2015 GDP data for
Australia showed annual
growth down at 2.0%/yr
Growing largely below
trend
since 2007
Real Income in the
economy very weak
Falling commodity prices,
flat profits and low wages
growth
Partly offset by a lower
AUD –
expect more depreciation
Negative impact on
government revenue and
Budgets
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Australia: Business and consumer confidence close to average –
households saving less
Business confidence now a
little above average –
helped by lower AUD and
NSW growth
Consumer confidence has
been volatile
Retail sales doing a little
better
But consumers saving less
to maintain consumption
given weak income growth
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Adviser Use Only
Australia: Trade is still a source of economic growth
China still no. 1 export
destination but has fallen
with weaker commodity
prices
Japan is no. 2. India and
US to pick up share
Free Trade Agreements
signed with Korea, Japan
and China... India to
come
Resource exports still
dominate
Improvements in rural
(beef)
and services (education
and tourism)
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Adviser Use Only
Australia: Unemployment rate lower than expected, AUD below long-term
average
RBA cut rates in February and
May 2015 – as the
unemployment rate continued
to drift higher
Unemployment rate back to its
peak of 6.3% in July
Still lower-than-expected and
suggests Australia’s potential
growth rate has declined
RBA expected to be on hold
now
Lower AUD has helped and
should move lower with Fed
lift-off
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Adviser Use Only
Australia: Housing market very strong – debt burden is rising, but
repayments still affordable
House prices getting very
expensive
Demand coming from: low
interest rates, local
investors, SMSF and
foreign investors
Household debt to income
hitting
new highs around 160%
But low interest rates
mean repayments are still
affordable
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Adviser Use Only
Australia: Infrastructure and housing supply are critical
Infrastructure critical to
housing affordability,
jobs and productivity
improvement
Coming (mostly) from
NSW
Residential approvals
growing strongly
High-rise residential
approvals now
very similar to
detached housing
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Adviser Use Only
Australia: Potential economic growth will be lower
Australia’s potential economic
growth rate could have fallen to
around 2.5%–2.75%, from
3.25%
Ageing population
Unchanged labour force
participation
Productivity challenges
are critical
Real GDP per person set to fall
Real GDP growth potential
set to fall without productivity
enhancing and participation
enhancing policies
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Adviser Use Only
Outlook: Next 12 months
First rate rise in US still
underestimated by markets
China – going through an
important adjustment.
Equity market volatility and lift in
short-end bond yields
Slower growth, more financial
market reforms but a government
who
still wants control
More debate over impact
on longer-term bond yields
Europe – third bailout package for
Greece, growth divergence
and a future of stronger
institutional frameworks
Australia – slower growth, need for
infrastructure and government to
promote growth, lower interest
rates unlikely
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Adviser Use Only
Outlook: Issues surrounding lower potential growth
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Adviser Use Only
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