Economic Update – RBA upgrade growth outlook
The Reserve Bank of Australia (RBA) has supported the recent economic commentary regarding the emergence of more sustainable global growth. Driven by the recovery in advanced economies, the RBA has forecasted that the growth of Australia’s global trading partners throughout 2014 will be faster than the growth in 2013, at around 4.5%.
Our research provider, Bank Credit Analyst (BCA) acknowledged that although risks remain (in particular, deflationary risks and the risk of an increase in the value of the Euro) they believe that economic adjustments have been both widespread and all-encompassing.
To support this view BCA produced a special report this month on Spanish economic performance since the global financial crisis. The Spanish economic adjustments have seen increased exports & labour productivity, the private sector reducing their debt levels and Spanish banks have become much stronger. This is a positive sign for the Euro zone.
Data out of the United States (US) has been mixed in recent weeks. Investors will need to watch trends over coming months to determine whether this bout of mixed data is due to a period of bad weather across the country or signs that the US economy is slowing.
Although this negative data does not look attractive, it seems that the US recovery is becoming more self sustaining with positive tail winds coming from improvement in housing prices and construction as well as the movement towards domestic energy self-sufficiency (supportive to domestic employment and the trade deficit).
China and Japan
Since the US Federal Reserve announced in May 2013 that it was considering reducing its stimulus package, emerging market (EM) economies and their currencies have been hit hard by the removal of investor capital. This has not been the case for China. China is less reliant on foreign capital and therefore in a stronger economic position than other EM’s. China’s announced reforms on the relaxation of economic restrictions and supply-side reform should strengthen its economic position over the years to come.
Whilst Japanese economic growth remains weak compared to international standards, with Gross Domestic Product (GDP) for the 4th quarter of 2013 only recording 0.3%, the result still emphasises that Japan is continuing to recover from its decades of economic contraction.
The most recent unemployment figure for the domestic economy increased to 6.0%, from 5.8%, for the first time since July 2003. Employment statistics are a lagging indicator of economic conditions and as such do not allow for improvements in other indicators, such as increased job advertisements.
Interestingly, the RBA in their February Statement on Monetary Policy, have upgraded their outlook for growth in 2014, which suggests that the economy may have turned a corner.
The RBA left the official interest rate unchanged at 2.5% at their February Board meeting. Following the meeting the Board announced that “on present indications, the most prudent course is likely to be a period of stability in interest rates.” Although short-term rates are expected to remain steady, forecasters are still divided on the next move from the RBA (whether it will be a move up or down).
At current rates, the opportunities are limited to invest in cash as an investment class, apart from short-term liquidity requirements and the certainty of capital protection.
Opportunities in this asset class will remain limited given the expected rise in long term interest rates following the Fed decision to commence a reduction in their stimulus programme, and Australian short term interest rates are unlikely to keep pace with inflation. Managers who invest in a diversified portfolio of securities and/or focus on floating rate securities are preferred options.
The global fixed interest index (Barclays Global Aggregate Hedged) returned 1.67% for the month of January and the Australian fixed interest index (UBS Composite 0+ Yr) returned 1.09% for the same period.
Whilst in recent months the media has been focused on the increasing prices of Australian residential property, we believe the outlook for the broader property market is more subdue. With economic growth still below long term trends and the opportunities for higher yields available in other asset classes, property investments as expected to offer a lower return relative to the risk taken.
Infrastructure remains the preferred investment in this sector due to the less volatile nature of returns and the generally more stable, long-term cash flow opportunities.
Whilst Australian equity prices have remained fairly unchanged from the start of December to most recently, there have been some significant movements in both directions during that period. These movements were primarily the result of external factors – e.g. the second reduction to the US stimulus package and an unexpected decrease in a Chinese manufacturing indicator.
The key point to note out of this episode is that unlike 2013, the expectation is that external factors will play a greater role in generating volatility in the local market throughout 2014.
Similar to Australian equities, the beginning of 2014 saw most global equity markets decline from their 2013 highs due to concerns about the strength of the world’s two largest economies (US and China). The extent of these declines, however, varies across the globe.
The Morgan Stanley Capital International (MSCI) global indexes for the month of January are below.
MSCI Emerging Markets: -4.12%
MSCI Japan: -1.42%
MSCI United States: -0.97%
MSCI Europe: -1.42%
Michael Williams B Fin B Math Adv Dip FS (FP) CFP®
Michael Williams is a Director and Senior Adviser at JSA Financial Group.
He has over 10 years experience in financial services and has attained the internationally recognised professional status as Certified Financial Planner. Michael works with clients to deliver advice to help achieve their overall financial and lifestyle goals.