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Your money and asset outlook for 2017

How is your money likely to perform in the year ahead and where should you be putting it?
Bianca Hartge-Hazelman
December 20, 2016

2017 is crawling towards us so where is the best place for your money in the year ahead and what’s the economic outlook for assets?

We ask some of the top women in finance for their views. But first, here’s a recap of some of the things that affected your money in 2016.

  • The Reserve Bank of Australia (RBA) cut rates twice in 2016. We started the year at 2 per cent, but persistent weakness in economic growth was the main trigger for cutting rates in April and then again in August to a current setting of 1.5 per cent.
  • Lower rates fuelled strong housing construction activity and property price growth in Spring, particularly in Sydney and Melbourne. But on the flip side it also reduced the value of your money sitting in cash accounts.
  • The major banks also acted out of sync with the RBA and raised interest rates on fixed and variable rate mortgages for investors. They cited the need to protect their profit margins but it’s also likely they see the need for higher rates in the future.
  • Household consumption has been mixed in 2017 as many people have benefited from higher house prices, yet wages growth hasn’t really moved and nor have bank savings rates improved. Retail sales were weak in the first half but improved more recently. Indeed the major retail stores have been anticipating a strong Christmas spending period.

What’s ahead for economic growth in 2017?

Jo Masters senior economist Australia and New Zealand Banking Group: We expect economic activity to slowly improve over 2017. The drag from the end of the mining boom will fade, but the support from the housing construction cycle and stimulus from the lower Aussie dollar will also fade. We expect economic growth to lift to 2.5 per cent, from an estimated 2.3 per cent this year.

Su-Lin Ong chief economist RBC Capital Markets: Following two further cuts to the official cash rate in 2016 to a new low of 1.5 per cent, some fiscal stimulus by stealth, and stronger commodity prices, the economy moves into 2017 with a little more momentum. The two key factors which have been substantial headwinds to activity in recent years—the ongoing decline in mining capex and the continued adjustment lower in commodity prices/terms of trade—are abating, with the latter providing some tailwind into the end of 2016. This is underpinning an improvement in national income, a key metric in providing a better gauge of the underlying health of the economy and an important determinant of RBA policy settings.

Inflation will remain below target in the first half but we expect it to be edging a little higher further into 2017 with maximum excess labour market capacity and global disinflation behind us. It will, however, remain low enough to give the RBA scope to cut if activity disappoints.

Nicki Hutley chief economist Urbis: Despite the larger than expected downturn in the Australian economy in the September quarter this year, we are not on the verge of a recession and in fact 2017 is likely to see continuing modest growth – around 2.5 per cent to 2.75 per cent for 2017 as a whole.

What’s your prediction for RBA rates in 2017?

Masters: We see the RBA on hold, with the cash rate staying at a record low of 1.5 per cent. We see the RBA as operating with an easing bias though given that inflation and wage growth are yet to turnaround.

Ong: The RBA looks set to sit on its hands for some time, with conflicting forces and heightened uncertainty after the US election supporting this prudent approach. We retain a final 25 basis point cut in our profile in 2017 but this protracted easing cycle is drawing to a close.

Janu Chan senior economist St George Bank: We remain of the view that RBA rates will likely stay on hold for a little while but the risk is still that they will need to cut again in 2017. Long-term interest rates, as measured by the 10-year government bond, are expected to move higher.

Do you forecast a recession?

Masters: No. We have had one quarter of negative growth but expect a bounce back in the fourth quarter of this year. While the economy has lost some momentum, there were a number of temporary elements  to the weakness in the September quarter. In particular, the weakness in public spending and profits is likely to be reversed and early indications suggest that household spending will bounce back.

Chan: No, there is always a risk of one though. Probably around 15 per cent chance over the next 12 months.

Hutley: Not in 2016 or 2017. While the September Quarter was a surprise, much of the negative influence came from temporary factors and we would expect the annual rate of growth to return to above 2 per cent in the final quarter of the year. While we are seeing underemployment increase, we are still seeing employment growth – not something you see in a recession – and there has been nothing in the way of a large shock – domestic or external – that is likely to tip the economy into recession at this time.

How will the Aussie dollar perform?

Masters: We expect the Aussie dollar to depreciate slowly over 2017, ending next year at US$0.68. We are forecasting a broadly stronger US dollar. We expect the 10 year bond yield to rise to 3.3 per cent by end 2017, led by US bond yields.

Chan:  The US dollar has already risen a bit and I think that can’t go much higher, which means that the Aussie dollar may not fall much further this year or next. That said, the Aussie dollar is quite volatile so it could overshoot but we don’t anticipate it will fall to much.

Hutley: The dollar is prone to sudden and sharp movements that are not always explained by economic fundamentals! That said, rising US interest rates (or the prospect of them) will keep a ceiling of the currency in 2017 of around US$0.76, while commodity prices are likely to help keep a floor of around US$0.70. The currency is stronger on a trade-weighted basis.

How will property perform?

Hutley: The risks are more that there will be an easing off in price growth. We could see prices correct by 5 per cent if a recession occurs. But I don’t see much more than that, unless there is a major shock to the property market caused by a perfect storm of higher interest rates, recession and higher unemployment. But I don’t see that happening.

Ong: Mortgage rates will remain low and population growth has eased but is around the decade average at 1.3 per cent and strong by international standards, with unemployment unlikely to test above 6 per cent on a sustained basis. We are mindful that the market is diverse across Australia and within states/cities, but the aggregate picture is one of a moderation in housing activity and prices.

APM Price Finder expects property price growth in Sydney and Melbourne of 3-4 per cent, and 2-3 per cent nationally over 2017. Popular regional hubs such as Wollongong, Newcastle and Byron Bay are likely to see stronger price growth of 4-5 per cent in the next twelve months.

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Bianca Hartge-Hazelman
December 20, 2016
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