The global economy continues to gradually improve, with growth forecast to slowly pick up speed from 3.2% in 2016 to 3.5% this year and to 3.6% in 2018 (IMF, July Update).
Progress though remains especially slow for the developed world, with growth forecast to be only 2.0% for the advanced economies this year and an even weaker 1.9% next year, up from 1.7% in 2016.
The IMF notes that ‘growth remains below pre-global financial crisis averages’, with ‘many advanced economies facing excess capacity as well as headwinds to potential growth from ageing populations, weak investment and slowly advancing productivity’. The IMF prescribes ‘well-sequenced and tailored structural reforms to boost productivity and investment’.
The problem is that this appears to be easier said than done. As Janet Yellen, Chair of the US ‘Fed’ has noted, lifting productivity is ‘a challenge that lies substantially beyond the reach of monetary policy’ (3 March 2017). In other words, strongly expansionary monetary policy is not enough on its own to lift investment, productivity growth and ultimately economic growth. What is needed too is innovative fiscal policy, as well as less burdensome regulatory policies, as these ‘are best suited to address adverse structural trends’.
In the case of the US, it had been hoped that the new Administration in the US under President Trump might be able to make some progress by implementing fiscal reforms, including significantly lowering taxes (particularly corporate tax rates), while also reducing the regulatory burden on businesses. However, as the IMF notes, ‘expectations of fiscal stimulus (in the US) have receded’.
In the case of Europe, there has been little response by Germany to the IMF’s call for ‘greater reliance on measures to support domestic demand, especially in creditor countries with policy space’ (19 July 2016), although Euro zone growth has been slowly rising in the recent months.
The Australian economy slowed in the March quarter, (up by 0.3%) and actually declined on a per capita basis (by 0.1%). The trade balance has been improving due to strongly rising export volumes of iron ore in particular, but the economy faces growing competitiveness hurdles, with high corporate tax rates, escalating electricity prices (with growing unreliability in base load supply), high minimum wage rates, over-regulation of business and the labour market, and a currency that is too high. According to the NAB business survey for June, ‘the longer-term outlook could easily underperform as important growth drivers begin to fade’.
Major share markets have mostly been on an upwards trend since the US Presidential election last November. Market movements so far this year (up to 28 July) included rises of 10% for the broad US market (S&P500), 18% for the technology-laden Nasdaq index, 6% for Germany, 3% for the UK, 4% for Japan and 5% for China, while the Australian market barely moved, partly due to a strongly rising currency (up 11% against the USD). Most share markets still appear fairly valued compared with sectors such as bonds and cash.
Major global government bond markets saw yields (interest rates) trend downwards from late 2015 (soon after the US central bank began to raise interest rates) until July 2016, taking yields close to historic lows. Bond yields have since been trending higher but have been volatile. Overall, most bond markets continue to appear expensive.
Fiducian’s diversified funds are currently somewhat above benchmark for domestic and international shares and slightly under benchmark for listed property. Exposure to fixed interest sectors is underweight, while cash weightings remain above benchmark.
The information on the Fiducian website is not intended to be a recommendation, offer, or invitation to invest. Any advice is general in nature and does not take into account your investment objectives, financial situation and particular needs. You should consult your Financial Planner for advice before making investment decisions.