September 2018 Economic Update

The global Economic expansion continues to march forwards with a number of advanced economies growing at above-trend rates. Unemployment rates are also low. Downside risks remain, particularly the US-China trade war and high USD$ debt exposure of some emerging market economies. The US economy remains one of the strongest performing and this looks set to continue while China growth has slowed a little. Globally, inflation remains low, although it is increasing in some countries as labour markets tighten.

In the US, GDP is consistently strong and is expected to show annualised GDP growth of 4%+ when data is released (week ending 7/9/18). US businesses and households are exhibiting strong momentum in their spending, supported by solid growth in company earnings, improving wages growth, low unemployment and rising household wealth, driven by gains in US house prices and the share market. Corporate and personal income tax cuts are contributing too. Further increases in US interest rates may slow growth, but it is worth keeping in mind that after seven Fed rate hikes since late 2015 the Funds rate is still only 1.75%, or 1.15 percentage points below the latest 2.9% y-o-y CPI inflation rate. US real interest rates are still well short of territory that might actively constrain growth and supportive of our position that current monetary policy setting are supportive for equities. All of this positive new is driving the USD$ higher relative to other currencies which is a problem if your debt is in USD$.

China remains stable with GDP growth ending down to 6.7% y-o-y from 6.8% and the slowing trend looks set to continue. Slower growth and weaker import appetite is partly driven by the US-China trade war however it’s the EU that is likely to suffer the most from the ongoing trade dispute. The Chinese authorities have 6.5% GDP target so we don’t think they will allow GDP to fall below this.

In Europe GDP was revised up to 2.1% but still down on the previous quarter.  Growth is still above the long term trend and unemployment is falling. In Germany employment conditions are tight with wage and inflation pressures increasing. While the European Central Bank (ECB) accepts that European growth prospects are solid, it is still reluctant to act too quickly reducing monetary accommodation. At its latest policy meeting the ECB reaffirmed that it will finish its purchases of securities (quantitative easing) by the end of 2018 and will deliver a first interest rate hike in late summer 2019.

In Australia we continue to break records. The RBA has kept interest rates on hold for 2 years now and our record breaking period without a recession rolls on and looks unlikely to end soon. GDP was strong at circa 3.4% with retail sales increasing and stronger construction spending.  The low AUD$ has stimulated the trade surplus with a strong lift in exports. Momentum looks strong but the RBA remains cautious. RBA Governor has commented that Australian growth will move to above-trend in 2019 and expects inflation to pick up….eventually. The rate move will be up but expectations of that rate move continue to be deferred and is now generally accepted to be likely sometime in 2020. For now, households continue to dip into savings which, without sustained wage increases, cannot last and along with high household debt will prevent the RBA from raining rates.

Overall, we remain positive on the outlook for international equities and Australian equities with current monetary and fiscal policy settings still very supportive. The US-China trade war is likely to escalate in the short-term which will impact on global growth but is not expected to cause a recession or a bear market in equities, emerging markets exposed to USD$ debt are more likely to be a problem. Australian housing prices particularly in Sydney and Melbourne are slipping and this have been further evidenced by the slowdown in new car sales. However, households have continued to dip into savings which cannot last. The low level of interest rates is required to support households until we see sustained wages growth.

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This information was prepared by Royston Capital, ABN 98 158 028 392 AFSL 438262. The information in this presentation is current as at 10 Sept 2018 unless otherwise stated.

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Sources: Admiral Investments, Alexander Funds Management (Steven Roberts); RBA, Pendal