Proving that no one has a Crystal Ball, economists and presidential pollsters alike are looking back on 2016 and wondering how they got it all so wrong. As AMP’s Chief Economist, Shane Oliver, recently noted, “2016 was perhaps remarkable for the things that many thought were obvious at the start of the year but did not happen.”
As Olivier explains, some of these non-events include the Global Economy which did not nosedive; the American Federal Reserve Bank which did not rapidly raise interest rates; the crash of commodity prices that never came; the non-plunging of the world’s markets into darkness as a result of the Brexit and Trump votes; the predicted slowdown of economic conditions in China; the end of the EU which still remains intact; and the Aussie Property Bubble that has not burst.
That’s A LOT that did not happen.
In fact, as the team from AMP reminds us, the reality of the year has been quite tame and expectations for 2017 aren’t too bad:
1. The Global Economy is continuing to grow, this year at approximately 3%
Overall things looked stable throughout the year. The improving growth in the US and the stabilisation in Chinese growth were the major driving factors behind the growing Global Economy.
Economists expect the Global Economy to continue to improve – rising above 3% in 2017. The belief is that advanced nations will grow on average at a rate of 2%, whilst Chinese growth should be about 6%.
2. Commodity prices are on the rise
The increase in commodity prices was a huge surprise to most economists after the lows of 2015. Many had anticipated commodity pricing would continue to drop, but solid demand and supply cuts have brought it back up.
Current expectations are there may be a short term pull back, dropping prices slightly in 2017, but overall the commodity market will grow.
3. Global politics have moved to the Right
After the Brexit, the US election of Trump and the recent Italian referendum, it is almost safe to say the world is leaning to the right.
It is still hard to say how this will affect the economy in the coming year, but global trade could be at risk.
4. It’s been another year of “easy money”
Continuing on from last year, money is pretty cheap around the world. The US Federal Reserve Bank significantly reduced its planned interest rate hikes, and the central banks of Europe and Japan are continuing to ease its policies. Interest rates in Australia, as well, are at record lows. Whilst this is good news for borrowers, it doesn’t provide much incentive for those with money sitting in bank accounts.
It is believed that the US will raise interest rates several times in 2017, however this may be offset by Trump’s planned fiscal stimulus policies. China as well may begin to increase its rates.
In the rest of the world, economists think it is likely that interest rates will remain low and further easing in Australia is a possibility.
5. Australian growth has been disappointing
Growth in Australia has been disappointing this year, despite our strong start, having actually contracted by 0.5% in the third quarter.
Expectations are that the Aussie economy is will likely grow at a 2.5% rate in 2017 and the interest rate may be cut to 1.25% in the first half of 2017, as the nation’s inflation rate continues to be lower than the 2-3% target.
Overall, 2017 seems like it will be reasonably positive thanks to the acceleration in global growth, rising profits, decent returns from the stock markets and continued low interest rates.
There are still a lot of variables to watch and look out for, like the policies of President Trump and how he tackles globalisation; the elections throughout Europe; the rise of bond yields and US interest rates; and investment rates throughout Australia’s non-mining sectors.
Regardless of what the year brings, it remains in the best interests of your portfolios to remember to not act rashly, make sure your assets are well-diversified and within the right risk limits for you.
If you are thinking about making changes to your portfolio, make sure you seek the advice of your financial advisor.
If you would like to read Shane Olivier’s thoughts and more about the economics of 2016 and expectations for 2017, please click the link here.