AMP Capital discusses 2016 economic outlook

Interviews

Transcription of Finance News Network Interview with AMP Capital (ASX:AMP), Head of Investment Strategy and Chief Economist, Dr Shane Oliver.

Natalie MacDonald: Hello, I’m Natalie MacDonald for the Finance News Network. Joining me now to discuss his economic outlook for the year ahead is AMP Capital (ASX:AMP) Head of Investment Strategy and Chief Economist, Dr Shane Oliver. Shane, welcome to FNN.
 
Shane Oliver: My pleasure, it’s great to be here.
 
Natalie MacDonald: Firstly can you share with us your forecasts for some of the likely economic drivers for 2016?
 
Shane Oliver: The big one to look at is global growth and we think it’s another year where it’s a bit on the soft side, but not too bad. We’ll probably hit global growth around 3 percent, which should in turn underpin gains in sharemarkets. So we see most sharemarkets putting in somewhat better returns than what we saw in 2015, but still more like high single digits rather than the negatives or low numbers like we saw in 2015. Interest rates, I think in Australia we’ll see more rate cuts, probably taking the cash rate down to around 1.75 percent. Aussie Dollar, heading lower, maybe down to 60 US cents and economic growth in Australia still remaining relatively sluggish, around 2.5 percent, maybe picking up towards 3 percent by the end of the year but for most of the year it’s going to remain fairly sluggish.
 
Natalie MacDonald: China is currently spearheading concerns surrounding global growth. Is Australia in a robust enough position to weather this instability? How is the economy positioned in terms of the global marketplace?
 
Shane Oliver: In Australia it’s all about rebalancing. For the last 3 or 4 years now, the mining sector has been in decline, the mining boom’s long over. But it’s not just last year, it’s the last 3 or 4 years that it’s been unwinding and yet the Australian economy has managed to keep growing, so it’s all about rebalancing. New South Wales, Victoria, doing very well, offsetting the weakness we’re seeing in Western Australia. I think the reality is that as China remains sluggish, weaker than it used to be, that means low commodity prices and of course that all feeds through to a lower Australian Dollar, which helps the economy. So I think Australia can withstand weakness in China. But by the same token it’s still fairly fragile, still needs a bit of help. I think we’re still going to need more weakness in the Australian Dollar going forward and probably also more help from the Reserve Bank.
 
Natalie MacDonald: Focusing on monetary policy, what are your forecasts for Reserve Bank activity in the coming year? To what extent will the central bank be guided by activities in the US and expectations of further rate hikes from the Federal Reserve?
 
Shane Oliver: Well quite clearly what goes on globally does effect Australia and does effect what the Reserve Bank does. I think it’s been hopeful that the Fed would raise interest rates, and of course it did last year, because it takes some of the pressure off the Australian Dollar. So they would have welcomed that. Going forward though, I think the reality is that we’re in a world of relatively sluggish growth. That means ongoing softness in commodity prices, which means that we’re still not going to get that boost to national income that we got used to last decade from rising commodity prices. If anything it’s still the other way around. So in this environment I think the Reserve Bank’s going to remain fairly cautious. The debate is about whether they leave interest rates on hold at 2 percent or whether they cut again. My feeling is that in an environment of still constrained growth globally, weakish commodity prices and signs that the housing sector is topping out in Australia, the Reserve Bank is more likely to have to cut interest rates again rather than leave them on hold.
 
Natalie MacDonald: The Reserve Bank is no longer nominating a new preferred level for the Australian Dollar, but further falls are expected in 2016. How does this shape your outlook for the local currency?
 
Shane Oliver: I think the Aussie Dollar needs to go lower and it will go lower. The bottom line is that normally when you’ve got an environment of steeply falling and weak commodity prices, the Aussie Dollar goes down, just like when it went up into 2011 when the iron ore price went to $180 and like it collapsed to 48 cents 15 years or so ago. That’s the normal cycle. And the Aussie Dollar overshoots. So the Reserve Bank would probably say fair value is around 73/74 US cents. We’re now a little bit below that perhaps. But history tells us we need to overshoot to help the economy rebalance again, and I think that’s what we’re going to see. So I actually see the Aussie Dollar heading down to 60 US cents over the course of the next 12 months, which I think will provide further support to the economy, particularly in areas like tourism, higher education, obviously the manufacturing sector but also the mining and farming sectors.
 
Natalie MacDonald: Shane Oliver, thanks for the update.
 
Shane Oliver: My pleasure, thank you.

Ends.

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