Transcription of Finance News Network with Westpac Banking Corporation (ASX:WBC) Chief Economist, Bill Evans
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from Westpac Banking Corporation
(ASX:WBC) is its Chief Economist, Bill Evans. Bill, welcome back to FNN.
Bill Evans: Thanks, my pleasure.
Lelde Smits: Let’s start with interest rates – The Reserve Bank of Australia (RBA) kept the key cash rate on hold at a record low of 2.5 per cent at its first board meeting of the year. Where do you see interest rates heading over 2014?
Bill Evans: The consensus view is that the RBA’s next move will be up in rates. I think the market is pricing in about an 80 per cent probability that rates will be up early next year. My view is a little different. I think that there is still a number of uncertainties in the economy that may indeed lead to the requirement that rates will come down further.
Lelde Smits: You mention rates rates will head lower, when do you think this will occur?
Bill Evans: I think if, generally if the decision to cut rates is made, typically you won’t do that just to do one – because it would be a huge reversal in terms of where the Reserve Bank is thinking at the moment. They’re thinking that the next move will be up. To turn around and have to cut rates, you wouldn’t do that if you thought that the economy only needed one cut. So, if we do see that process evolving then there will be a couple of cuts at the end of the year.
Lelde Smits: So Bill, where do you see the key cash rate sitting by the end of this year?
Bill Evans: Well that would be 2 per cent cash rate.
Lelde Smits: The RBA has recently pulled back from claiming the Australian dollar is too high. What’s your forecast for the local currency?
Bill Evans: Because I think interest rates can come down in the second half of the year I would see the Aussie dollar down around $US0.85 by the end of the year. The other big dampening factor on the Australian dollar is going to be a fall in the terms of trade associated with weaker demand from China and also improved supply of commodities of response to the higher commodity prices that we’ve had over the last few years.
A combination on that squeeze on commodity prices and the weakness in China, likely to see the Aussie dollar also have some downward pressure. So, lower interest rates and a fall commodity prices will be the things that will drive the Aussie down. But, I don’t see that evolving until, certainly until the second half of the year when the China story becomes more clear and when we see lower rates. If we don’t see lower rates then the Aussie dollar could well hold for a lot longer.
Lelde Smits: Looking abroad China’s latest trade data has exceeded expectations. Are you bullish or bearish about the nation’s economic prospects?
Bill Evans: Generally speaking I think the new management, the new government in China is focused on rebalancing the economy away from investment and infrastructure towards consumption. That means that they have to accept a lower growth profile. That means that a number of producers that are not complying with general standards and are lowering China’s confidence in consumer goods will have to leave the market. It means that the safety net will need to be expanded – that’s money going into pensions,going into health and education. Growth multipliers on those are a lot lower.
So, I would expect that the Chinese growth profile will be in the low 7’s rather than the mid to high 7’s. It seems to me that the consensus, and we’ll feel that.
Lelde Smits: Now you say, "We’ll feel that", could you elaborate on exactly what we will feel?
Bill Evans: Well we expect to see further falls in commodity prices and the terms of trade. The iron ore price has currently fallen quite quickly down to about $US120 per tonne - we’re looking for $US110 per tonne. I think there will be more downward pressure on the coal price. Australia’s competitiveness in the coal market is poor. We are a high coal cost producer. China is clearly wanting to move away from coal for environmental reasons. Other producers are coming into the market that are cheaper and more efficient. So, the combination of those I think would represent some downward pressure. Not only on prices but on our capacity to deliver.
Lelde Smits: And finally Bill, the S&P/ASX 200 index has posted a soft start to the year after gaining about 15 per cent last year. Where do you see the key benchmark trading and ending this year?
Bill Evans: We’re reasonably optimistic about the share market. We feel that companies are still in that process of improving their productivity, of improving their earnings as a result of cost control. And to some extent, we’ll see some revenue growth as well. But to me the key dynamic that has supported share markets in the last few years has been strong earnings growth associated with productivity – doing things more smartly, doing without labour to do things. And I think that will be the key driver, so I think about a 5-10 per cent jump in the share market next year or this year is quite achievable.
Lelde Smits: Good to finish on a positive note. Bill Evans, thank you for your insights.
Bill Evans: Thank you.
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