Feature Stories | Jan 29 2020
A sluggish economy and a strong stock market in 2019. Forecasts for 2020 are becoming increasingly diverse.
-Equity valuations stretched
-Bushfires/coronavirus cloud monetary/fiscal policy assumptions
-Economic data suggest weak December quarter
-Commodity prices considered key
By Greg Peel
When stock market analysts and economists began preparing their annual market outlooks for the year to come back in November, the US-China “phase one” trade deal was yet to be signed and the UK election was yet to be held. (2020 Outlook: Australia)
Since those reports were complied, Boris Johnson’s landslide victory has all but taken Brexit off the list of global risks, pending EU trade negotiations notwithstanding, and the signing of the phase one trade deal has led to no further tariffs or tariff increases and indeed some tariff reductions.
While pundits agree phase one is more show than substance, it has at least reduced uncertainty and lifted global spirits.
In Australia, virtually all in the market were forecasting an RBA rate cut in February due to the sluggish economy, specifically an unwilling consumer. But consensus conceded that further rate cuts were likely to have little impact, thus requiring the Morrison government to lend support with fiscal initiatives. At that time the Morrison government remained hell bent on retuning the budget to surplus.
Morgan Stanley – to choose one forecaster – was assuming a February rate cut but also assuming, albeit without great conviction, Morrison would bring forward the next round of promised tax cuts to the 2020 May budget.
In the interim, the surprisingly swift rebound in house prices, leading to a return of “bubble” warnings, and a surprisingly strong December jobs report have led to the market greatly reducing the odds of an RBA rate cut in February. As for the fiscal side of the equation, nature has intervened.
Fire and Pestilence
The Australian fire season begun last year in August and was raging by November. Then it got worse. The government’s response has been in no way swift, but subsequent announcements of assistance handouts equate to some level of fiscal stimulus.
However, even if we assume these government injections square off the GDP against bushfire cost, we’re still where we were last year: with monetary policy requiring fiscal policy to provide support.