Yahoo Finance What's ahead for the Australian economy and markets in 2020
Happy New Year!
2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.
It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community.
2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target.
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The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.
The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.
In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.
GDP Growth
It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.
On balance, annual GDP growth is set to pick up to around 2.5 per cent by the middle of 2020 and is forecast to hit 3 per cent by year end.
Contributors to the better economic performance include public sector spending, including on infrastructure, a moderate increase in business investment, an upturn in dwelling investment in the second half of the year and a moderate 2.5 per cent lift in household consumption aided by a positive wealth effect (house prices) and savings that are able to be deployed for spending. The risk favours GDP growth exceeding 3 per cent by year end.
Jobs market
The labour market is set to remain problematic in the first half of the year, hindered by the ongoing below trend growth rate and signs in the leading indicators for labour demand which are universally negative. As a result, annual employment growth is set to weaken to around 0.75 per cent in the first half, meaning average monthly job increases of around 10,000 only. The unemployment rate will be nearer 5.5 per cent than 5.0 per cent.
As the economy improves through the year, the unemployment rate should start to head lower, perhaps a tick or two under 5 per cent by year end. With the unemployment rate stuck above 8 per cent, an acceleration wages growth will remain elusive through the year.
Only when the unemployment and under employment rates fall below 5 per cent and 7.5 per cent, respectively, is it reasonable to expect wages growth to exceed 2.5 per cent.
Inflation
Inflation will remain low for the bulk of the year, hindered by the soft economy. Only late in the year, if the economy performs as expected, it is likely to hit 2 per cent. Until then, it is set to remains a few ticks around 1.75 per cent in annual terms which of course is below the RBA 2 to 3 per cent target.
For inflation to reach or exceed the mid-point of the target, GDP growth needs to exceed 3 per cent, with wages growth above 3.25 per cent for a sustained period.
Monetary policy and bond yields
The economic scenario means the RBA may cut interest rates one final time, early in the year, but even that cut below 0.75 per cent is by no means certain. Perhaps this final rate cut is after another low inflation reading.
That said, signs the broader economy is improving will mean the RBA could be reluctant to cut further and by around the June quarter, it will (finally) have its broader view validated by more positive news, particularly in business investment and a bottoming in the dwelling investment cycle.
While it would be folly to assume any interest rate hikes from the RBA during 2020 (or would it?), after such a protracted period of low growth, inflation target misses, it would not be surprising to see the market flirt with interest rate tightenings priced into 2021.
The chances of the RBA implementing some form of quantitative easing remain low.
The call on the bond market is more straight forward – yields higher. At the time of writing, the 3 year yield was around 0.85 per cent, with the 10 year at 1.30 per cent. Targets are somewhat meaningless when looking for an enduring market trend to unfold, but it would be no surprise to see the 3 year get near 1.25 per cent, perhaps 1.5 per cent during the year. The 10 year is forecast to approach 2.0 per cent or more.
House prices
The surprising recovery in house prices from the middle of 2019 will likely continue, although the power of the price rises will fade somewhat during the year. A nationwide price rise of 7.5 per cent for 2020 seems a cautious forecast with the bulk of the rises seen in the first part of the year.
Of course there will continue to be considerable divergences from city to city, town to town. Perth is poised to register a decent rise, perhaps 10 to 15 per cent as a shortage of dwellings becomes apparent and the mining sector looks to increase its investment spending.
Sydney and Melbourne will likely register solid gains for the year of 6 to 8 per cent while Brisbane, Canberra and Adelaide will be more constrained. Hobart, having been a strong market in recent years, is likely to continue to do well – a tight market supply will be a boost for prices.
The interesting issue will be nearer year end if there is talk that interest rate increases are in the offing – will that hit confidence in house prices? I suspect the price surge will moderate in any even in late 2020.
US stocks
It’s election year and having had a huge run up in share prices in recent times, a decent pull back is likely. This is forecast to be fundamentally driven by the US Fed close to the end of its interest rate cutting cycle and the prospect of a change in President impacting investor sentiment.
If there is a real chance that some of the absurd tax breaks put in by the Trump administration are likely to be reversed, share prices could register meaningful declines of 15 to 20 per cent. At the time of writing, the S&P500 was around 3,240 points – a dip below 3,000 is feasible, with a move towards 2,900 likely in the event of a hawkish Fed and a progressive President.
The ASX
The ASX had a good 2019 and should consolidate in 2020. It will be helped by a solid commodity cycle and much of the ‘bad news’ priced into the market dominant banks. At the time of writing, the ASX 200 was around 6,770 points and it is set to break above 7,000 in the first half of 2020.
Any negative lead from the US will filter into the local market which means that little net change is likely over the course of the year as a whole. Year-end target 6,750.
The Australian dollar
The Australian dollar is kicking off 2020 on a more positive tone close to 0.70 cents. Expectations of a lift in global economic growth and improving domestic conditions are positive for the dollar. Throw in a scenario where interest rates will be edging up from current pricing, a huge international trade surplus and ongoing buoyancy in commodity prices and the scene is set for Aussie dollar gains.
It is not unreasonable to expect the dollar to trade above 0.7700 during the year, with more upside risks if the economy is sufficiently robust to see the market price in even modest interest rate increases.
Good luck – and may the markets go your way.
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