While the outlook for Australian economic growth has stagnated recently, the outlook for the US remains positive. The high unemployment rate continues in Europe where slow GDP growth is expected. In the UK, the outlook is more promising.
The recent fall in the price of iron ore – Australia’s biggest export – has caused the outlook for Australian economic growth to weaken. The price fall is largely the result of a decreased demand for steel, driven by over-supply and the decline in Chinese house prices. Despite this, net exports have been a big positive contributor to GDP growth in recent quarters.
Although somewhat offset by expansion in some areas of private investing, investment spending in the resources sector is starting to decline significantly. Also, consumer confidence has retreated and is only marginally above that of the post Federal budget lows. This decline in consumer confidence may result in lower consumer discretionary spending and higher precautionary savings.
Over the next 12 to 18 months, the employment outlook is lacklustre and it’s possible the unemployment rate could increase to seven per cent. With this backdrop, the prospect for real wages growth is poor. Despite some inflation due to the lower Australian dollar, the RBA is unlikely to hike rates from 2.5 per cent until at least the second half of 2015. Overall, Australia is unlikely to grow at the same pace as in recent years.
The outlook for US economic growth remains positive and is on track to grow at 2.5 – 3 per cent over the next year and consumer confidence has improved considerably. This is due to the decline in the unemployment rate, to 5.9 per cent, as well as the increase in net wealth resulting from gains in housing and share prices over the past few years. That said, consumer confidence levels are still below pre-GFC levels while the outlook for business confidence and capital expenditure is encouraging because of the large levels of net cash on corporate balance sheets.
Post the tapering of quantitative easing, the Federal Reserve has indicated that rate rises will be data dependent. However, in the minutes of last September meeting it was hinted that rates won’t rise if global demand is weaker than expected and if the higher US dollar eases US inflationary pressures.
There is potential for modest increases in real wages in the US but, given the low workforce participation rate, the extent of any increases is likely to be small.
While the outlook for GDP growth is reasonably positive, the outlook for corporate earnings isn’t as promising. The recent US dollar strength will increase the price of US exports, making them less competitive. Or, US corporations will need to cut their prices to keep them steady, in local currency terms, and this will impact margins. The strength of the US dollar will also reduce the value of offshore earnings in US dollar terms. While US revenue growth remains anaemic, margins are at historical highs which means the long term earnings growth outlook may not be as robust as expected. Corporate margins may hover at their current historically high levels, but further margin expansion is unlikely to be significant, which is necessary to achieve the expected earnings growth.
The consequences of this are not necessarily poor share market performance, however, further price earnings multiple expansion is required if there is to be any further share market appreciation of considerable magnitude.
In August 2014, German factory orders declined by almost six per cent and industrial production fell by four per cent, the worst single-month drop since early 2009. This has clearly been driven by Russian sanctions due to the war in the Ukraine but is also due to weak underlying European growth. Spanish industrial production has also slowed.
In the period ahead, Europe is likely to exhibit very slow GDP growth (with significant disparity in growth rates between countries). Negative interest rates highlight just how concerned the European Central Bank is and, in the coming months, more active stimulus is expected and quantitative easing is likely. Given the very high overall unemployment rate of 11.5 per cent and low workforce participation rates, there is minimal pressure to increase wages. Banks remain in deleveraging mode, and credit conditions remain relatively tight.
The outlook for UK GDP growth is more promising. Consumer spending is growing and business investment has finally started to exhibit some robustness. Inflation is also higher, equating to significantly higher nominal GDP growth than continental Europe.
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General Advice Warning
The information provided in this blog is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this blog you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Your adviser can help you with this.
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