As the global economic situation is set to continue the volatility of recent years, investors need to keep their eye on what is happening. We’ve compiled our top five issues to watch for in 2017.
Where will Trump take us?
The idea of a politician promoting trade protectionism these days would normally draw some derision from the mainstream and confine them to obscurity, but somehow the newly elected US President has been able to make it a central part of a platform that got him elected to the most powerful position in the world. It’s a wild card development that underscores just how volatile the economic landscape can be and how quickly things can change.
The Trans-Pacific Partnership that Obama so actively sponsored was going to be the next big global move on the free trade front, but Trump’s position represents a complete about face on the issue. The International Monetary Fund are on the record as being big supporters of free trade and have lambasted any suggestion of re-introducing trade barriers as being counterproductive to growth, jobs and wages, so it will be fascinating to see what the real global outcome of Trump’s actions will be.
His corporate tax cuts and infrastructure spending proposals are the other major items to keep an eye on, with suggestions that an initial sugar hit to markets may be followed by an uncertain aftermath.
How will our biggest trading partner fair in the year ahead? China is facing growing corporate and household debt and is depending on a major economic transition away from export-driven growth and toward domestic demand-driven growth. On top of this is the threat of a trade war with the new US administration. While China’s growth rate is still the envy of other nations, it faces considerable challenges in the year ahead and its leader, Xi Jinping, will be under the microscope on how he deals with them.
China remains Australia’s biggest trading partner
Will inflation turn the corner?
The stubbornly low domestic inflation rate is a real conundrum for policy makers and the RBA, with the inflation rate remaining below 2 per cent since late 2014. Inflationary doldrums are afflicting many other world economies too, with most having rates below the target bands of their central banks.
The US seems to be in a stronger position than Australia on this issue, with the prospect of Trump’s infrastructure spending helping to drive inflation higher, while Australia’s inflationary growth is weighed down by relatively high unemployment and persistently weak wage growth. China’s inflation also seems set to be stronger than ours as the effects of stimulus spending hit home. While the chances of falling into deflation are remote, the outlook in the short term for domestic inflation remains sluggish.
Where will interest rates go?
Closely linked to the inflation story is the perennial challenge on interest rates. The Reserve Bank continued its cuts during 2016, but this leaves less room to move going forward. It faces the unenviable dilemma of needing to lower rates to stimulate our flagging growth rates, while needing to keep rates steady to help contain the raging property prices of recent times.
Internationally, the use of quantitative easing (effectively printing money) to stimulate growth has perhaps reached its limits, which will increase pressure for central banks to tighten credit by increasing rates in the near future. This could impact markets negatively.
Is the property price bubble going to burst?
Some analysts have been warning of a drop in property prices for some time now, but somehow the market has continued to defy the predictions. So will the bubble burst this year? No one has that crystal ball, but if you look at the fundamentals, the risk of this happening cannot be ruled out. House prices relative to income have never been so unaffordable, the housing supply shortage in the major markets is set to be flipped on its head and turn into a glut and interest rates may be on the up before the end of the year. These factors all point toward downward pressure on house prices. While they may continue to defy logic, it would be a brave investor who banks on the continuation of the growth of recent years.
How do you keep track of all this?
The domestic and global economic machinations are full of contradictions and trying to predict actual outcomes can be fraught with danger, even for the most experienced analyst. That doesn’t mean that investors should abandon all attempts to make judgement calls on how these issues will affect their investments. This is where professional financial advice from a Bridges financial planner can add some real value. They can provide access to quality economic and market insights and help you plan your investment strategy to take advantage of market movements.
What are your predictions for the biggest economic news of 2017? Share your thoughts below.