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Summary of Fiducian Quarterly Investment Strategy Report

Economic Outlook Summary
December 2016 - February 2017
For a full version of this report please contact Marketing


The global economy is forecast to gain a little momentum in 2017 but the advanced economies as a group continue to experience sluggish growth. On the other hand, growth continues to be stronger in key parts of the developing world.

Expansionary monetary programs introduced in the aftermath of the global financial crisis that began in 2008 have proved insufficient on their own to return the world to pre-crisis growth rates. Investment and productivity growth remain too low and more needs to be done to restore investor confidence and lift growth and inflation.

Despite low growth across the developed world, the US central bank has embarked on a course of tightening monetary policy. On 14 December, the ‘Fed’ raised rates for the first time in a year, although admittedly only to 0.5%. Even this though could be premature, given that growth has been unimpressive, at least until the September quarter. Many obstacles remain to strong growth, including over-regulation, excessive taxation, growing under-employment and overspending on welfare by government. A focus on measures designed to lift investment & boost productivity is now needed.

The need for a focus on measures to boost growth across the developed world has become urgent. In the words of Christine Lagarde, Managing Director of the IMF, the longer demand weakness lasts, the more it threatens to harm long-term growth as firms reduce production capacity...and critical skills are eroding’. As such ‘forceful policy actions’ are needed to avert the onset of a ‘low-growth trap’ for the advanced economies. Infrastructure programs are seen as one way for the US, Germany and other economies to lift growth.

The developed world in particular is growing too slowly and, according to the IMF, could land itself in ‘a low growth trap’. Forceful policy actions are needed, including cuts to welfare spending, lower taxes and structural reforms. Premature tightening of monetary policy needs to be avoided.


The US economy managed something of a rebound in the September quarter after three straight quarters of very weak growth. Despite signs of recovery though, private investment remains weak, posing a challenge to policymakers. As Alan Greenspan, ex-Chairman of the ‘Fed’, recently explained private investment in plant and equipment is too low to generate solid productivity growth, which is the key to sustainable economic growth. In such an environment, the ‘Fed’ is likely to be cautious.

The other main focus of the ‘Fed’ and other key policymakers has been the labour market and here the news has been better than for some other economic indicators. In particular, the unemployment rate dropped to its lowest level in 9 years in November, although in recent years under-employment has grown. The construction sector, a big employer, could soon start to feel some effect from a slowdown in home price growth and in investment in the sector. The good news though is that despite rising mortgage rates, housing affordability remains reasonable and household net wealth has continued to reach new highs, while consumer confidence appears to have picked up in the wake of the Presidential election. Also positive for the economy more generally has been solid growth in bank lending to businesses, along with money supply growth

Growth in most of Europe, as in the rest of the developed world, has been too weak for too long. The euro zone as a whole managed growth of only 0.3% in the September quarter, with France and Germany (the latter being the beneficiary of an undervalued currency) each managing growth of only 0.2% for the quarter. The ECB has announced an extension of its ‘QE’ program until at least the end of 2017, while Germany is being urged to lift infrastructure spending. In the case of Japan, the central bank is holding long-term bond yields at around 0% and is maintaining a large ‘QE’ program. Better news comes from China, where strong growth has pushed commodity prices higher and where growth is forecast to hold at over 6% for both 2016 and 2017.


The Australian economy contracted for the first time in 5 years in the September quarter (GDP fell 0.5% for the quarter but grew by 1.8% for the year). In contrast to GDP, national income growth did better, reflecting a better outcome for the terms of trade, which have been boosted by stronger commodity prices for some key exports in recent months, including $US price rises of 106% for iron ore, 42% for thermal coal and 10% for gold from end-January to 8 December. The $A though rose by 2% against the $US over the same period, partly due to its perception as a ‘commodity currency’ and partly due to high local interest rates. In consequence, our international competitiveness has been affected and the RBA may need to lower rates again soon.

The Liberal/National Party coalition that was narrowly returned to power in the July federal election is finding it difficult to have reforms passed by the Senate. As such, large Budget deficits can be expected to continue, along with steadily growing levels of government debt. There appears to be little on the horizon that might be able to kick-start stronger growth. With the housing cycle likely to peak soon, the RBA may have to act to support economic activity, lift inflation and at least marginally improve competitiveness by lowering official interest rates further and hopefully driving the $A lower.

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