Episode Details

With the 2019 calendar year quickly drawing to a close, I thought it would be good to have a look at what next year might bring in terms of investment risks and opportunities.

Over the years, I found that its best to form opinions on the economy by reading analysis/insights and attending economic briefings, whilst being careful to not overindulge. Too many opinions and viewpoints can confuse and sometimes send you down a rabbit hole. This should be complimented with real-world observation such as taking notice of retail traffic conditions, anecdotal discussions with businesspeople and so on. This approach has served me pretty well over the past few decades.

The economy and the risk of recession

There has been a bit of press lately about the risk of Australia and other developed economies (including the US) slipping into a recession.

Australia is now in its 28th year of uninterrupted economic expansion – which is a world record for a developed economy. But all records must end someday. That said, population growth and raw-material (iron ore) exports have been big contributors to our economy over recent decades. I don’t see that changing anytime soon. However, some sectors of the economy have been really struggling. For example, retail trade has been flat in the year to September 2019. Retail weakness has mainly manifested in household goods (probably impacted by the property market slowdown) and department store sales (thanks to online competition). Wage inflation has also been low with the Wage Price Index recently coming in at 2.2%. Prior to early 2013, the index used to always be above 3% (and peaked at 4% just prior to the GFC). But this phenomenon isn’t unique to Australia – all developed economies around the world are struggling to generate wage inflation.

In terms of globally, the US deserves the most attention because it’s the largest developed economy by far. The Fed Reserve has been cutting rates to keep the economy growing. President Trump has called for more rate cuts (even negative rates) and for them to recommence quantitative easing. Lower rates in the US are expected to depreciate the US dollar which should add some more fuel for the economy.

On the whole, I think a recession in Australia or in the US is unlikely in 2020. Of course, both economies are getting closer to an economic slowdown as each month passes. Barring any unforeseen circumstances, I think these economies will keep ticking along albeit at a slower rate.

Interest rates

Interestingly, in a speech on Tuesday night (26/11/19), the Reserve Bank Governor suggested that it would prefer to cut rates two more times before implementing quantitative easing, which I was personally pleased to hear.

I normally defer to Westpac’s chief economist Bill Evens for interest rate forecasts, as I have found he’s been consistently the most accurate over the years. Bill is forecasting only one more rate cut which is predicted to occur in the first quarter of 2020. But the big question is how much will the banks pass on? I suspect that they will continue with what they have done the last few times i.e. pass on circa 0.15% of the cut onto most borrowers but the full 0.25% for interest only investment loans.

After the interest rate cutting has finished, it will then be up to the government to loosen fiscal policy and increase its spending to further stimulate growth. Thankfully, Australia’s low debt levels relative to other devel