Market Economics – Stephen Koukoulas Blog
A year ago, I outlined my top 10 economic and policy issues for 2013 in my Business Spectator column, which can be seen here.
With 2013 all but over, the bank manager and key clients are well satisfied.
Those Top 10 calls for 2013 from Business Spectator are reproduced in full below and I have a short comment following each one.
In the next day or so, I will outline a similar top 10 for 2014. If it is as successful as this year, it may well be a bath in Billecart Salmon this time next year.
From Business Spectator:
The top 10 big issues for 2013
1. GDP growth
GDP growth is likely to muddle near 2.5 per cent early in 2013 before easier monetary policy and a more positive tone from the global economy boosts activity through the course of the year. A solid pick up in housing construction and a lift in household consumption will be significant contributors to the growth pick up, and will take up some of the slack from a less robust mining sector. With accommodative monetary policy in place, the cash flow for the household sector and business will be growth positive. Government demand will continue to act as a dampening influence on economic activity, moderated in part by the decision of the government to allow the automatic stabilisers to support activity. By end 2013, GDP growth is likely to be around 3.5 per cent.
[Comment: GDP growth was 2.3% in the year to the September quarter and looks like holding 2.75% when the December quarter data are released next year. I may have been a quarter premature with my call for stronger GDP growth. Components panning out as expected.]
Inflation (RBA underlying) will be skewed towards the bottom of the RBA’s 2 to 3 per cent target as the lagged effect of softer growth through 2012 impacts on prices. The persistently high Australian dollar will further dampen import price pressures, at least for the first half of 2013. Another dampening influence on inflation is the moderate wage increases and solid growth in productivity. By end 2013, the moderation in inflation may be dissipating and the market and RBA may legitimately be factoring in inflation risks in 2014.
[Pretty much spot on. Inflation is locked in the lower portion of the 2 to 3% band, but the September quarter was high. With the December quarter CPI next month, the annualised run rate for the second half of 2013 is likely to be near 3%.]
The unemployment rate will be five-point something every month during 2013. And while it might edge up in the first half of the year as the economic expansion unfolds a little below trend, it should end 2013 near where it is now, that is 5.2 per cent. The forward indicators for jobs point to the unemployment rate moving higher in the near term and it would be no surprise to see an off month with unemployment hitting 5.7 or 5.8 per cent. But as economic growth picks up through the year, the unemployment will fall back lower to around 5.2 per cent.
[See comment on GDP but the unemployment rate has basically been in a 5 ¼ to 5 ¾% range all year. It just has not started to tick down yet but it probably will as growth accelerates.]
4. House prices
House prices have been weak for two years. Stretched affordability has finally been catching up to house prices and to the extent there ever was a bubble, it has been deflating in an orderly manner. The fundamental drivers of house prices are increasingly positive. Strong population growth is underpinning long run demand, while low interest rates, low unemployment and rising real wages are likely to underscore housing demand and therefore prices. After the weakness of the last two years, it would be no surprise to see house prices rise 10 per cent this year.
[Again, spot on, with house prices surprising just about everyone else with gains of 10% locked in for the year.]
5. Monetary policy
Monetary policy will remain accommodative through 2013. The RBA is likely to cut interest rates in the first part of the year as it catches up to the slowing growth and low inflation dynamics prevailing at the moment. The official cash rate is likely to bottom out at 2.5 per cent during the June quarter with ongoing low inflation driving the reasons for the easings. Rates are likely to remain on hold over the second half of 2013, but it would be no surprise to see financial markets starting to price in the risk of a monetary policy tightening as the year draws to a close.
[Again, close to perfect, with the only variance a month or two out on the date of the rate cut to a historical low of 2.5%. According to a Bloomberg survey in early January 2013, there were only four other forecasters out of 29 expecting the cash rate to end 2013 at 2.5%.]
6. Australian dollar
The Australian dollar ends 2012 significantly over valued. It is a classic market overshoot based on strong global investor demand for Australia’s triple-A rated assets. Markets can be prone to overshoot but in time they inevitably revert to fair value. If the Australian dollar reverts to fair value during 2013 it is likely to be trading near US90 cents at some stage. That said, a free-fall in the dollar is unlikely because of the global economic improvement through the year and the possibility that commodity prices move higher as China and the US pick up. The trading range for the Australian dollar for 2013 should be US88 to US106 cents.
[Another near perfect forecast – the range for the year (with 2 weeks to go), has been US89 to US106 cents, embarrassingly accurate. Recall that when the forecast was made, the AUD was trading at US105 cents.]
7. Australian stock market
The Australian stock market is likely to continue to move higher aided by a move positive growth and profit outlook. A bearish year coming up for bonds will also likely see an asset allocation move to stocks. At some stage during 2013, the ASX200 will break above 5000 and could well trade at 5250 as the year progresses. A positive lead from global markets will be a positive driver with super stimulatory policy prevailing in the US, Europe, Japan and the UK.
[The ASX was strong, up until a few weeks ago. The ASX200 hit 5,400 and looks like ending around 5,100. I probably was a touch too bullish.]
8. Bond yields
Bond yields will stay low in the early part of 2013 aided by the policy actions of the US Fed, the European Central Bank and the Bank of England. As the economy accelerated and the market started to become a bit more concerned about inflation risks, bond yields should move higher. It is likely the 10-year government bond yield will exceed 4 per cent from the middle of the year.
[Again a good call with the 10 year yield currently around 4.3%, up over 100 basis points for the year. It has been good to be short.]
9. Australian election
The election should be held in October, around the 19th or 26th. While an Abbott-led coalition victory is more likely than not. That said, the fickle nature of the political environment, the unpopularity of Mr Abbott and a positive policy agenda from the Labor Party could easily see the election go either way. With economic management – including interest rates – usually an important influence in election outcomes, the Labor Party could win. It will be that versus the carbon and mining taxes and issues of trust that will be driven by the coalition in forming the election campaign issues. It is not yet clear whether the election would be market moving, other than if there was a coalition victory, but without control of the senate, there may be a year or so of policy stalemate as the senate blocked policies to remove the carbon and mining taxes.
[Election date wrong, winner correct, and issues wrong. The economy was not the focus of the campaign. My error. The election outcome has been market moving, although not in the way some would expect. Markets are increasingly taking a dim view of the economic credentials of the new government.]
10. Federal budget
In terms of policy, Treasury is obviously of the view that the budget will record a small deficit in 2012-13. That outlook is premised on a half year of sub-trend economic growth, ongoing softness in commodity prices and the terms of trade remaining weak. For the 2013-14 budget, the government will be incorporating the financial cost of implementing the Gonski education reforms and the roll out of the National Disability Insurance Scheme. When incorporating these policy changes in the budget on May 14, it will find the money to fund it. Expect to see a scaling back of the generous tax treatment of superannuation and more policies that limit benefit payments to high income earners.
[Nothing much either way here. The budget deficits are small, and aside from the unexpected policy decisions from the new government, a surplus was on track in the next couple of years.]