[video] CommSec Economic Insight: 2013/14 snapshot

Savanth Sebastian, economist at Commsec gives a good overview of our economy in this 4 minute video and has some good news for investors as he sees a better year ahead for us in 2014, but warns that as the economy improves the RBA could hike rates at the end of the year.

In summary:

Quite simply, the Australian economy struggled to get out of third gear over much of 2013. But we are hopeful that the economy will finally find fourth gear over the 2014 year.

The main culprit holding back the economy in 2013 was the election. Businesses and consumers simply weren’t prepared to ramp up spending, investment and employment until the election was out of the road. But the economy was also in the transition phase with mining investment topping out, while home construction and mining exports were starting to lift.

There were also the budget problems in the US with enforced spending cuts serving to slow economic growth.

China struggled to get past issues in the financial system. But by the end of 2013, growth had picked up in the US and China. The European debt crisis continued to dominate attention in the early part of 2013 before settling.

The Reserve Bank cut the cash rate from 3.00% to 2.50%.

The ASX 200 rallied by over 15% in 2013.

Outlook for 2014:

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Global Economy:
Over the past 30 years, world economic growth has averaged 3.3%. Growth in 2013 was estimated at 2.9%.

The IMF expects 3.5% growth in 2014, in line with our forecasts. Emerging & developing nations are the key engines of growth.

United States:
The export and housing sectors are driving economic recovery. Congress is having more success in dealing with fiscal issues, while Fed tapering is likely to be slow and considered.

Confidence will continue to improve and economic recovery will continue. Employment is expected to lift over the year as recovery consolidates.

We expect economic growth in a 2.75-3.25% range in 2014, suggesting near “normal” economic growth. Inflation should hold between 2.0-3.0%.

Unemployment should hold between 5.50-6.00 %, trending lower over the second half of the year.

Australian dollar:
Over the past 20yrs, the Aussie dollar has, on average, tracked in a US13.7 cent range. In short, the Aussie dollar is volatile and 2013 has been a year of above-average volatility.

Over 2014, a range of US88-94c could be assumed. In the first half of 2014 we can envisage a scenario where focus shifts to ongoing US Federal Reserve stimulus withdrawal; US economic recovery consolidates; and Chinese growth lifts.

Overall, businesses must work on the premise that the Aussie dollar is likely to come under pressure in 2014.

Interest rates:

Over 2013, the cash rate has averaged 2.75 per cent. – the lowest calendar year average since 1959. So while people can debate whether rates are at record lows or not, there is no debate about the last time period that rates have been this low – it was 54 years ago, back in 1959.

A “soft landing” has been achieved. We expect solid, sustainable growth of 7.5-8.0% in 2014.

The biggest industrialisation in world history is still in its infancy, presenting wonderful opportunities for Australia.

Leaders have embraced a “do what it takes” approach. Low interest rates are fostering a pickup in confidence and activity.

There are still risks but they have diminished over the past year.

Interest rates:
The Reserve Bank is likely to remain on the interest rate sidelines over the most part of 2014. But longer-term rates are tipped to rise across western nations by between 60-70 basis points over 2014 as global economic growth lifts closer to longer-term averages of around 3.5 per cent. A likely range for cash rates in 2013 is 2.25-2.75 per cent.

Investors are becoming more confident and looking for higher returns outside cash. If the improvement in confidence continues, with stabilisation of the global economy then shares and property will be favoured by investors. At present we tip, 5,400-5,700 for the ASX 200 by end year. Total return on shares has averaged around 11-12% over the past 30 years: we tip growth near 10% in 2014.

Despite a recent trend to greater utilisation of existing property, population growth is firm near 1.8%, rental markets are generally tight and home building is lifting.

We tip firmer home building and sales over 2014 with Australian home prices to lift around 3-5%.





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