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Economic and Investment Update - December 2014

by Dr Shane Oliver

2014 - a positive year for investors...mostly

2014 has had its share of worries with a range of geopolitical threats, uneven global growth, the end of quantitative easing in the US, plunging oil and iron ore prices and a debilitating debate about budget cuts in Australia. Yet again, events have conspired to indicate deflation as opposed to inflation is more of a risk. Despite all this it was still a reasonable environment for most assets. Key themes have been:

The combination of okay but not too hot, not too cold global growth and low inflation meant the global investment cycle remained firmly in the “sweet spot” for investors. But as over the last few years, it was not a simple "risk on" environment. In particular, commodity related trades including the Australian share market were big underperformers.

2015 - still in a global sweet spot

As always there seems to be plenty of calls for global recession in the year ahead based on everything from quantitative easing to demographics. However, there remains good reason for cautious optimism.

Source: Bloomberg, AMP Capital

In short, the next global recession looks to be a long way off – maybe not until later this decade in accordance with the cyclical pattern that has prevailed since the 1970s of major recessions every 8-10 years: mid 1970s, early 1980s, early 1990s, early 2000s, late 2000s, later this decade?

Reflecting all this:

For Australia, non-mining activity is likely to continue to pick up pace but in the face of falling national income and subdued confidence this will likely require further monetary stimulus in the form of a lower $A and a further RBA interest rate cut. If this occurs then improving conditions in sectors like housing construction, consumer spending, tourism, manufacturing and higher education should see GDP growth move up to around 3%. At the same time inflation is likely to remain benign. The RBA is expected to cut the cash rate to 2.25% early in the year with a 50% chance of another cut in the June quarter.

Implications for investors?

The continuing sweet spot combination of okay global growth, but still low inflation and easy money is positive for growth assets. But an eventual rate hike by the Fed and ongoing geopolitical flare ups are likely to cause volatility

What to watch?

The main things to keep an eye on in 2015 are:

 

December 29, 2014
 
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