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Summary of Fiducian Quarterly Investment Strategy Report

Economic Outlook Summary
March 2018 - May 2018
For a full version of this report please contact Marketing


The global economy is still strengthening; according to growth estimates provided by the International Monetary Fund (IMF) in its latest Update (22 January). In its report, the IMF raised its growth forecasts yet again, with global growth projections 0.2% higher than in their October report for both 2018 and 2019, taking forecast growth to 3.9% for both years.

As Maurice Obstfeld, the Economic Counsellor for the IMF put it in October, ‘the global cyclical upswing that began midway through 2016 continues to gather strength. Only a year and a half ago, the world economy faced stalling growth and financial market turbulence. The picture now is very different, with accelerating growth in Europe, Japan, China and the United States’. In its latest report, the IMF’s even stronger growth outlook is predicated on ‘the expected impact of the recently approved US tax policy changes, which are expected to stimulate activity’. In particular, ‘the short-term impact in the US is mostly driven by the investment response to the corporate income tax cuts’ (which passed through Congress in December).


The US economy put in a solid December quarter (with growth up by 2.5% at an annualised rate), boosted by strong growth in private investment. There was also strong growth in the consumption of durable goods (up by 14%, reflecting growing consumer confidence). Spending on plant and equipment grew strongly for the fourth quarter in a row (up by 7%), with spending purely on equipment up by 12% (all data annualised). Continuing strong growth in private investment could lead to stronger productivity growth in time, although productivity improvement for the year to December was only moderate (up 1.1%). One factor that prevented GDP growth from being stronger in the December quarter was import growth (14%) outpacing export growth (up 7%), so that net exports detracted a hefty 1.1% from growth.

Although President Trump has now introduced tariffs to apply to steel and aluminium imports from some countries (effective 23 March), these products amount to only around 2% of total imports and thus can have only a minimal overall impact. However, rising household spending, coupled with strong growth in private investment is giving a strong boost to total imports from around the world. What the US would like and what the IMF has also been seeking for some time is a better balance of world trade but this is unlikely to eventuate anytime soon (currently trade surpluses run up by China and Germany are around 3.4% and 6.4% respectively of their GDPs, while the US trade deficit is around 3.5% of GDP). While rising consumer imports reflect improved consumer confidence, this is also the case for spending on housing, which rose strongly during the quarter (up 13%, all rates annualised).

The ‘Fed’ recently noted that recent strength in consumer spending reflected ‘continued gains in employment, in real disposable personal income and in household net worth’. In fact, real disposable personal income rose 0.8% in the December quarter, driven by rising employment and by some growth in average hourly earnings (up 2.6% over the year to February, above the inflation rate of 2.1%). Household net worth reached a record high in the December quarter ($99 trillion), up by $44 trillion since 2008 and up $2 trillion for the quarter (US flow of funds data).


The Australian economy expanded at a moderate rate in the December quarter, with GDP up 0.4%. For the year to 31 December, the economy grew by 2.4%. However, during the quarter household consumption grew strongly, while private capital formation (investment) contracted, with a severe contraction in new engineering construction, as well as ongoing weakness in housing investment (down 6% for the year after a clampdown on bank mortgage lending). Spending on new engineering construction had rebounded in the September quarter but then reverted to the downward trend it has been on since it reached a peak during the mining boom in 2012 (dropping over 50% in total in 6 years).

While there has been modest total GDP growth over the past year, on a per capita basis it has been diluted by the country’s high rate of population expansion through immigration (a net addition of 193,000 in 2015-16 and an explosive 245,000 in 2016-17). In the December quarter, per capita growth was actually nil and was only 0.8% for the year. Looking beyond GDP data to what the Australian Bureau of Statistics calls ‘a broader measure of change in national economic well-being’, known as real net national disposable income, which takes account of the effect on national purchasing power of movements in the terms of trade (the ratio of our export prices to our import prices), this measure declined during the quarter and only rose by 1.5% for the year. This reflected a decline of 1.1% in the terms of trade, largely due to a 10% fall in the $US price of iron ore (our largest export item) over the period (offset to some extent by a near 20% increase in the price of thermal coal, our second-largest export item by value).

By early March, key commodity prices remained close to their year-end values, which was helping to support the currency, with the $A rising by 8% against the $US over the 2017 calendar year. This currency strength though has been one of the factors hindering the country’s international competitiveness. As such, the Reserve Bank (RBA) is likely to hold official interest rates steady at the current 1.50% as the ‘Fed’ continues to lift US official interest rates further over the rest of this year.

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