China, Brexit, the Federal Election and Trump. Financial markets and the economy hate uncertainty and these four issues keep haunting us and undoubtedly will continue to do so for the next year. China’s economy will in all probability continue to slow, Britian’s exit from the European Union is likely to be messy, the results from the recent Australian election make it extremely difficult to pass legislation and we still have the US Presidential election to content with later this year.
Realistically, the consequence of all the uncertainty can result in only one outcome – weaker consumer and business confidence. Households and business are likely to delay any major decisions on purchases and growth plans until they believe there is more certainty regarding the global and domestic economies. What a long, long winter we have had since those sunny fun carefree years before the global financial crisis !
Across the world, central banks, including our own Reserve Bank, will have only one option, in the next year, due to the low growth and low inflation economic conditions – reduce interest rates. In Australia, official interest rates are at 1.75%, inflation is running at 1.3% and the AUD/USD exchange rate is at 74.5 cents. We believe the Governor of the Reserve Bank may implement a further three interest rate cuts, to a rate of 1%, during the next twelve months in Australia.
The best strategy for business in such conditions is to be “Be Alert Not Alarmed”.
Further interest cuts are generally a good news/bad news story for consumers and business. Overall good for the economy, good for confidence, good for spending and good for borrowers but bad for investors in low risk assets (including term deposits).
While, we believe there may be some short term instability in the economy ultimately, concern surrounding these issues shall pass and we will all realise the significant opportunities before us.
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