17 finance predictions for 2017

Here’s a guide to uncertain times ahead with Trumpenomics, a fall in the dollar and gyrating property prices and all looming in 2017 from Australia’s top economists.

Economic growth

Australia's economy may be in for a sluggish year ahead following this week’s 2016 GDP downgrade to 2% by the Federal Treasury - from 2.5%. Economic growth is expected to pick up back towards 3 per cent during 2017, according to Commonwealth Bank economists. Globally, growth is likely to move just above 3%, predicts Shane Oliver, Chief Economist at AMP Capital.

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AAA+ rating downgrade

Although saved from a downgrade by ratings agencies Moody’s and Global S&P this week, one is looking more likely next year due to a AUD 10.3bn fatter-than-expected Federal budget deficit totaling total AUD 37bn unveiled by Treasurer Scott Morrison in this week’s mid-year economic update.

Ultimately, it would mean higher borrowing costs for Australia - and Australians, says David Bryant, chief investment officer at Australian Unity Wealth. However, with interest rates currently sitting at record lows – the impact on the average household would be pretty negligible, believes Commsec economist Savanth Sebastian. Many economists believe it’s more of a political hot potato than a direct fall out for households.

US Rate hike

With the [US] Federal Reserve recent rate hike by 25bp and as many as three more hikes expected in 2017, will have impact globally including on the Australian dollar, which will be pushed lower against the greenback. If so, capital will flow outwards to the US and imports will be more expensive. However, its not all bad news for us. “The fact that the US - still a key driver of global growth - is strengthening and building confidence, it will ultimately have a knock-on effect in Australia,” says Bryant. Closer to home, the Reserve Bank may sit on the interest rate sidelines in 2017 under the stewardship of it new Governor Dr Philip Lowe, notes Craig James, CommSec Chief Economist.

Fall in the AUD V USD

 The Aussie dollar versus the greenback may fall as low as $US0.68 (down from $US0.7360), predicts AMP Capital's Chief Economist. Holidays to the US will get more expensive, so it may be best to head to Europe or Japan as the AUD will be little changed against both currencies. A change in commodity prices – especially iron ore, domestic and US interest rates will all influence movements in the dollar. Expect a possible tightening phase in China.

Stock market uplift

The ASX 200 is likely to hit 5800 and “should be another year of reasonable gains,” predicts Oliver. Australian shares are likely to have solid returns as resource sector profits surge following the rebound in prices. Sectors to favour include resources, retailers, and banks, he says.

Housing prices: rise and falls

Home prices look likely to jump 2-3% on average nationally but this will mask a huge range with units down 5-10% in some areas where there is a lot of supply coming on, according to Oliver.

There is strong consensus that the residential construction boom is approaching its peak. Perth property prices are set to hit rock bottom, while Sydney and Melbourne house prices look set to slow. Expect 5-8% gains in Adelaide, Brisbane and Hobart.

Inflation

The Reserve Bank expects inflation to lift back towards the bottom of the 2-3% target band over the next couple of years. A recovery in domestic activity and an uplift in the global economy should lead to a modest uptrend in inflation, predicts Craig James, Chief Economist at CommSec.

Changing commodity story

There’s more to life than commodities. Economic growth next year will be “more than just the changing commodity story,” says Michael Blythe, Chief Economist at Commonwealth Bank.

The incipient infrastructure will be a key driver of the Aussie economy, he predicts. Melbourne Metro Tunnel, WestConnex, Sydney light rail are among the big-ticket projects.

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Asian century

The Aussie economy will continue to reap the benefits of rising Asian incomes, notes AMP Capital’s Chief Economist. Agriculture, education, tourism, health and financial services sectors will all receive a boost.

Farm ‘boom’

Favourable weather conditions means a farm “boom” is underway in Australia, says CBA’s Chief Economist.

Sluggish wage growth

Sluggish wages growth looks set to continue into 2017 which will, in turn, limit household spending, Blythe predicts.

Trumpenomics

Economists agree the formal ascendancy of Donald Trump as US President on 20 January is set to be the most crucial event for financial markets in 2017. But despite widespread fears it could be a good thing for global markets.

“Our view that Trump’s policies will be expansionary and stimulatory – especially his company and income tax cuts, increased infrastructure spending and reduced regulatory environment.,” says Stephen Halmarick, Chief Economist at Colonial First State Global Asset Management.

Trump may also pursue inflationary policies and aggressive monetary policy while his predicted protectionist policy slant may put the brakes on global trade growth. “Trump’s anti-trade policies could sow the seeds for an economic downturn late in Trump’s Presidency, seeing equity markets and the US Dollar sell-off and bond yields rally again,” says Halmarick. But these are likely issues for 2018-2020.

Super rebound

Average superannuation funds are predicted to return to around 7.5% return, AMP Capital’s Chief Economist predicts.

Static Savings

Average bank term deposit rates look set to remain around 2.5 to 3%...so “still depressing for bank depositors,” in 2017, AMP's Oliver also warns.

Continued uncertainty

And an ever-expanding range of geopolitical issues mean the global economic backdrop remains as uncertain as ever

So, what should we do amid all the uncertainty?

Diversify, diversify

“A sensible strategy right now is to ensure good diversification with a mix of currently low returning but secure fixed interest investments with higher yielding investments in other asset classes, including domestic and international shares, and property,” says Australian Unity Wealth's chief investment officer.

And finally…don’t be distracted by the noise

“We may see improved conditions domestically but investors should remain focused on their long term investment strategy and not become distracted by market noise,” Byrant adds.