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Summary of Fiducian Quarterly Investment Strategy Report

Economic Outlook Summary
June 2017 - August 2017
For a full version of this report please contact Marketing


The global economy ‘gained speed in the fourth quarter of 2016 and the momentum is expected to persist’, according to the IMF; although most of this pick-up is expected to come from developing economies. The advanced economies as a group are forecast to grow by 2% this year.

The growth outlook for the developed world is predicated on an upswing eventuating in the US, according to the IMF. This assumes ‘fiscal policy easing and an uptick in confidence, especially after the Presidential election’. The outlook for Europe and Japan ‘has also improved’, although risks remain.

The developed world has been struggling to return to strong growth since the advent of the global financial crisis in 2008. Highly expansionary monetary and fiscal policies have been widely used over this period but have not been as successful as anticipated. This has been due to embedded structural problems, including a low propensity to invest and a lack of productivity growth, neither of which can be adequately addressed by monetary policy alone. As Janet Yellen, Chair of the ‘Fed’, has noted, ‘fiscal and regulatory policies are best suited’ for this purpose. The preferred outcome would be significant de-regulation across industries, coupled with tax cuts and increased infrastructure spending. This policy prescription corresponds with President Trump’s program in the case of the US but progress in this direction has so far been minimal. Ideally too, welfare (‘entitlements’) spending) would be cut back but in most advanced economies this has proved to be politically almost impossible to achieve.

In spite of ongoing structural issues, the ‘Fed’ has begun to raise interest rates in the US and the Euro zone could be next. This process of tighter policy though poses risks to recovery.

The global economy has been showing signs of stronger growth but much remains to be done, particularly in the advanced economies. A premature tightening of policy needs to be avoided.


The US economy slowed further in the March quarter, with household spending markedly down, although this could have been due to transient factors. Encouragingly, however, private investment rose strongly, with net exports making a solid contribution to growth. The housing market also firmed and residential investment accelerated.

A key focus of the ‘Fed’ and other policymakers has been the labour market and here the news has been positive in recent months, with the unemployment rate dropping to its lowest level in 16 years in May (4.3%). This rate is now under the central bank’s assumption of what ‘full employment’ means in the current environment. As such, this gives impetus to the Fed’s aim to lift interest rates towards the ‘neutral’ rate (believed to be 3% today). This move towards higher interest rates is likely to see mortgage rates rise too. Which could lead to a rise in the household debt service ratio and potentially less affordable housing. Household net wealth though has continued to rise strongly on the back of continuing appreciation of stock markets and a pick-up in home prices, while consumer confidence has reached the highest levels in over a decade. Less encouraging has been slower growth in bank lending to businesses.

The European economy has finally begun to respond to central bank actions to lower interest rates and push money (or ‘liquidity’) into the banking system through ‘QE’. Bank credit has been growing strongly (particularly in Germany, which has been the beneficiary of an under-valued currency) and growth has been edging up towards respectable levels. Japan too appears to be emerging from its own version of a ‘low growth trap’ and is now benefiting from large-scale ‘QE’ that has been in place for some time, although its workforce is now declining by around 700,000 per year. In the case of China, growth continues to come in at over 6% per annum, with the economy being driven forward by a huge national saving rate and by high investment.


The Australian economy slowed markedly in the March quarter, particularly on a per capita basis. Productivity growth has been low and only a large immigration intake has been holding up overall GDP growth. The terms of trade, after rising for a year on the back of rising commodity prices, fell back somewhat in the June quarter, signalling that national income has probably begun to weaken. Prices for the country’s two largest export items, iron ore and coal, fell over the June quarter, although the $A remained relatively strong against other currencies, including the $US. This strength in the $A has been damaging our international competitiveness and, given this, the Reserve Bank would be unlikely to raise rates in the near-term.

The domestic economy needs, but is not receiving, a wide range of economic reforms. A wish-list of such reforms would include significantly lower corporate tax rates, a reduction in minimum wage and other labour market regulations, a realistic approach to ensuring the provision of reliable and cheap electricity (this having gone from the cheapest in the developed world to the most expensive) and more competitive currency settings. On the positive side though, the trade balance has moved to surplus.

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