Shane Oliver

Global growth is strong but the local economy seems destined to remain subdued

It’s often said that sharemarkets climb a wall of worry. That’s certainly been the case this year as the worry list has seemingly expanded (from the Fed to Trump’s tariffs, Italy and Australian property prices) and volatility has increased, and yet sharemarkets have trended higher.

Our assessment is that the trend in sharemarkets will remain up. The big positives are that global growth is strong but we are not seeing the signs of excess (such as surging inflation and over-investment) that precede recessions and major bear markets. This is underpinning strong profit growth at a time when shares, while no longer cheap, are not particularly expensive either and global monetary conditions are still easy.

However, there are a few storm clouds globally that warn of volatility at least. In particular, the US economy has little spare capacity and inflationary pressures are building. As a result, the Fed is continuing the steady drip-feed of rate hikes. Trade war risks between the US and China continue to build, and this in turn is putting pressure on Chinese growth. US political risks are increasing – notably around the Mueller inquiry and the mid-term elections – and risks around Italy remain.

In this regard there are several things to keep an eye on globally over the next month.

The trade war threat risks ramping up with the US threatening tariffs on another $US200 billion ($275 billion) of imports from China after September 5. How China responds will be critical.

The US Federal Reserve at its September 25-26 meeting is likely to hike rates for the eighth time this cycle to a range of 2%-2.25% and will be watched for guidance as to how much further it will go. And Italian budget negotiations risk taking it into conflict with the rest of Europe. September and October are also known for sharemarket weakness and volatility.

In Australia, the glass remains half full or half empty depending on your perspective. The huge slump in mining investment is bottoming, non-mining investment is picking up, infrastructure investment is booming and export volumes are strong.

But against this, housing construction looks to have peaked and there is uncertainty regarding the outlook for consumer spending on the back of continuing high under-employment, poor wages growth and falling house prices. These cross-currents are likely to keep economic growth averaging around 2.5%3%, which is a bit less than the Reserve Bank is expecting. This points to ongoing spare capacity in the economy and relatively high underemployment which, along with falling Sydney and Melbourne home prices, makes it very hard to see the Reserve Bank raising interest rates any time soon. Well, at least not until 2020 and it’s quite possible the next move will be another cut.

Locally, data for house prices (notably for Sydney and Melbourne), employment, retail sales and June quarter GDP are worth watching through September and early October to see how this goes, although our leaning is to expect more of the same.

The likelihood, though, is that with Australian economic growth remaining sub-par, Australian shares will trend up but capital growth is likely to be sub-par compared with global shares. And with the Fed continuing to hike and the RBA staying on hold, the Australia dollar has more downside ahead, probably to around US70¢.