Key points
- Consumer spending set to lift further as consumers look to spend 22% of household wealth in cash and deposits.
- Chinese growth might be lower as economy goes through structural change, but further growth might come from middle China.
- Interest rates will rise in the US and the Aussie dollar will fall, helping local exporters.
Dusting off the crystal ball, let’s look at what 2015 might have in store for investors.
Australian consumer sentiment and spending to lift in 2015
The “wealth effect” is likely to boost Australian consumer spending. Australians’ wealth has been boosted by $1.6 trillion over the last three years – mainly in superannuation and housing – to a record $7.78 trillion, according to CommSec. While the GFC caused the biggest-ever drop in wealth for Australian households, wealth levels have been repaired over the past couple of years and have hit new highs. CommSec says average financial wealth per person stands at just over $330,841, and almost 22% of total household assets are being held in cash and deposits – well above the decade average of 20%. Even though interest rates are poised to rise in 2015, they will still be relatively low by Australian standards, and it’s likely that households will be ready to invest – and spend a bit more freely.
Lower Chinese Growth
The China Gross Domestic Product (GDP) number has become very important to Australian investors. Back in the good old days – five years ago – we got used to double-digit growth rates. Slowly we have adjusted to a Chinese growth rate that started with a 9, then an 8, then a 7 – the most recent figure, for the third quarter of 2014, was an economy that grew at an annual rate of 7.3%, down from 7.5% in the second quarter, as a slowdown in the property market continued to hurt the broader economy. The property sector has cooled, this is slowing construction activity, and in turn, the economy.
China’s growth rate is heading into the 6s in 2015. Even just five years ago, with the growth rate above 10%, a rate starting with a 6% would have been unthinkable, but it is simply the result of (a) China’s stated determination to change the basis of its economy from fixed-asset investment and exports to domestic consumption and services, and (b) the property downturn.
But as the estimable independent economist Jonathan Pain points out, a growth rate with a six in front of the decimal point, on a US$10 trillion economy, is perfectly acceptable.
Further out, China faces demographic headwinds as its workforce starts to shrink – the opposite of what it had through the 1980s to the 2000s. However, another interesting theory I saw on China recently comes from CRU Consulting’s Allan Trench, who spoke at the Mining 2014 conference in Brisbane earlier this month. Trench said that while China would continue to grow, the “next China” was on its way – and that would be “western and central China.” We forget that most of the growth we have seen so far has come almost entirely from the coastal belt of 11 of the 22 provinces – and the Chinese government is putting in a massive effort to redress this in the interior.
Rising US rates
The US economy – still the largest in the world – is clearly leading the world. During the third quarter of the year, US gross domestic product grew at the equivalent of 3.5% a year, although that was a fall from the 4.6% annual rate seen in the second quarter, which was viewed as unsustainable. With the economy improving, the Federal Reserve last month, as widely expected, ended its unprecedented QE3 (quantitative easing, version 3) asset buying program, after adding US$1.7 trillion worth of financial assets to its balance sheet.
Strangely enough, when the Fed first hinted that it might think about “tapering,” or starting to end QE – in May 2013 – the resulting “taper tantrum” hammered the stock and bond markets. But this time around the market has realised that the Fed is removing QE support for the very good reason that it judges the US economy to be capable of standing on its own two feet.
Unemployment is down to a level the Fed considers “normal,” and companies are adding jobs at the fastest pace in more than a decade, helped by cheaper energy prices courtesy of the US shale gas revolution. The housing market is still not back to full health, but US consumers are spending. In a consumer-driven economy, this is the key.
This means that the US is on course for its first interest-rate hike since 2006 – some time in 2015. Given low inflation, the Fed will probably lift rates very cautiously, mindful of the effect on the housing market, the jobs recovery and consumer sentiment. But rising US interest rates – even off their near-zero lows – will have a couple of effects. Firstly, they set the tone for other interest rates, being the effective price of money. Secondly, rising rates compete with the stock market for funds – although in this case, the US stock market is reflecting the fact that rising rates imply a healthier economy.
Rising US$ means lower Australian dollar
Rising US rates benefit the US dollar, which is indeed rising in anticipation and this has negative implications for the Australian dollar. Just as when the Aussie went to parity with the US dollar and above, last year, it was not that currency markets were in love with the Aussie: it was that the money-printing in the US was depressing the US dollar, and our currency rose on the other side of that cross (although commodities strength also played a part). As we head into 2015, the Aussie is likely to show the reverse effect – depreciating against a resurgent greenback.
The Australian dollar is set for a fall in 2015 – somewhere in the 80s appears likely. This will not be a wholly bad thing, as it will benefit the earnings of our exporters.
Rising Australian rates
The Reserve Bank of Australia (RBA) has kept the official cash rate at 2.5% since August 2013, concerned about rising house prices and concerns about growth in China. But as the US lifts rates, and Australia moves through the cycle, the RBA is virtually certain to lift interest rates in 2015 – although when is the million-dollar question. Like the US Fed, the RBA will be judicious with the rises, not wanting to choke off the property markets outside Sydney and Melbourne. The extent of rate rises, too, can’t be guessed at: what will the RBA’s “new normal” look like? Will it be 4%, or 5%, and by when? We can’t know, but we can be reasonably certain that the upward shift will start next year – probably in the third quarter.
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