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2020 Outlook

Written and accurate as at: Jan 30, 2020 Current Stats & Facts

The global economy ends 2019 on a weak note, although the combination of interest rates decreasing over the year and the recent de-escalation in the US-China trade war has seen markets begin very strongly in 2020. With a hard Brexit looking less likely following a dominant Conservative victory and signs of an upturn in China, financial markets, particularly shares and property, have started with vigour.

The highlight over the month was China and the United States agreeing to a ‘phase one’ trade deal that would see the US remove tariffs on Chinese goods in stages. The agreement would require China to make structural reforms and change its trade practices in the areas of intellectual property, technology transfer, agriculture, financial services and currency. To the extent that the 18-month trade war and the associated uncertainty over the prospect of a deal had undermined activity and confidence, de-escalation is positive for sentiment and investment.

According to Fed Chairman Jerome Powell, “both the US economy and monetary policy are in a good place.” The US economy expanded by a revised 2.1% in the September quarter but with the equity market up more than 25% year-to-date, the focus will now turn to earnings. A lack of EPS growth this year leaves the US equity market vulnerable should the policy easing of 2019 and the de-escalation in trade tensions not flow through to business confidence and economic growth.

Of course, the other major news item on the political front was the impeachment of US President Trump, only the third president in US history to be impeached. The decision paves the way for a trial in the Senate, although given Republican control it is highly unlikely that Trump will be removed from his presidency. Given this markets have focused on the 2020 US presidential election rather than Trump being impeached given the selection of a new Democrat presidential candidate represents a potential source of risk for markets.

Europe economic growth continues to laggard triggering demands for a boost in government investment which has been an effective stimulant. There was more upbeat news on China during the month. A range of better-than-expected data releases and, of course, the announcement of the phase-one trade deal have reduced the risk of a more significant downturn in Chinese growth (at least for now).

Finally, in Australia, the economy enters 2020 growing well below potential growth rates, with excess capacity in the labour market, high levels of household debt and inflation almost 1.0% below the target rate. With the RBA drifting further away from achieving its inflation and unemployment targets, further cuts to the cash rate remain likely. Indeed, during the month, RBA Governor Philip Lowe signalled that the “effective lower band” for the cash rate was 0.25%, and against a background of weak capex, wages and GDP data, markets moved to factor in further policy easing towards this level by mid- to late2020. Despite a rise in household disposable income over the year, primarily driven by lower taxes and interest rates, household consumption growth remains weak. Consumers have opted to lift savings (from approximately 2.5% to 4.7%) and pay down debt, which is a significantly positive long-term development, but equally detrimental to short-term growth.

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