Here’s the second part of our look at the key economic changes and trends to be aware of this year, as Government policies and changing market conditions look likely to affect Australians more significantly in 2016-17 than any other time in recent history.
In the first part we identified and analysed three developments we expect to see, here are the five key others:
- Banks not passing on rate cuts
While official interest rates may go down, commercial banks are likely to avoid passing on some of the cuts to make up for rising loan delinquencies or higher wholesale funding costs.
Judging on past behaviour by the banks, around half the cuts may not be passed on to customers. This will help banks offset rising delinquencies by boosting their profit margin on sound loans. At the same time, competition among banks remains fierce and there are good deals to be had for savvy borrowers.
- Stock market may be range bound
With falling interest rates making it difficult to get strong returns on savings accounts, investors may look to the Australian stock market. This is likely to offer good income opportunities but may be range bound for some time.
Investors looking for higher returns may have to take on sensible investment risk. The volatile movements in the stock market that we have seen in the recent past may continue, however this volatility can bring opportunity. Investors may need to be very selective when investing for income, but we do see opportunities.
- A vulnerable US stock market
Despite a strong rebound recently, the US market remains vulnerable to a continued correction.
The US Federal Reserve finally raised interest rates last year after keeping them at near-zero since 2008. However, US growth is still nascent and depends on keeping inflation under control. If rates keep rising in the US, then a rising US dollar may impact on US listed multinational corporate profitability, which is at near record highs. Thus our cautious view on US share market index.
- China’s struggling economy
China’s economy has been in trouble for some time and, while its economic woes could get worse, it will not be a surprise to the market.
Those affected by China’s struggling economy, like minerals exporters, should already be well aware of the issues, and have contingency plans in place. This is not likely to be the source of a black swan event as problems have been well-telegraphed.
- Rising oil prices
Oil prices are likely to drift higher over a two-to-four-year timeframe. At below USD$55 per barrel, the shale revolution has been snuffed out.
Recent low fuel prices have been welcomed by motorists. However, as supply and demand come back into balance, Australians can expect to pay more at the bowser again. Our advice is to fill up your tanks now.
Evan Tsipas, Principal, RSM Australia
