The Economic Outlook and Investment Implications


Forecasting the economy is a notoriously difficult task that has been acknowledged by most observers. Every year
The Sydney Morning Herald and The Age conduct a survey of expectations ahead using a panel of prominent market economists, academic economists, consultants and industry economists. At the end of the year the outcome is analysed and normally a couple of the analysts are given an honourable mention for being closest to the outcome in their predictions. Whilst there normally is a fair degree of commonality in the panel’s very broad outlook, there are still considerable individual differences in their expectations for the various economic parameters, such as interest rates at the end of the year, the unemployment rate, economic growth rate, housing prices, the level of the share market etc, etc, including global economic parameters. For the just concluded year none of the panel members could get more than a few of the parameters reasonably right.

Is it really that difficult and if so, why? Well, one very prominent reason for the difficulty is associated with what we call factors X coming into play. Predictions for the future is of course based on current factors and how the panel members see such playing out, but unforeseen circumstances almost always crop up that change the outlook.

The beginning of this year presents us with two powerful examples, locally the severe bush fires and globally, as well, the emergence of the Corona virus. None of these factors X would have been foreseen a few months ago and of course they affect economic outcome expectations. In the meantime, some of the factors X of a year or two ago have diminished in perceived importance, e.g. the US China trade spat and Brexit.

Anyhow, here is our “prediction” for some economic parameters for 2020, just looking at what we know now and glancing at what so called expert commentators think – take it or leave it!

Economic growth around the world will slowly improve after a longish phase of being downgraded. Australian economic growth will continue to slide in the short term, partly due to the bush fires, but should improve a bit during the second half of the year. Interest rates will continue to stay very low and possibly decline one notch more before the year is out. The unemployment rate, including the underemployment, will remain steady but possibly improve slightly late in the year. Residential house prices will continue its recovery phase in Melbourne, possibly plateauing as from the middle of the year. The Australian dollar will rise slightly in value compared to the US dollar late in the year as the US dollar depreciates against other world currencies.

What might all this mean for investment markets – remembering that other factors X might burst on to the scene – and/or that our so-called predictions might be well off course?

Well, we think that fixed interest investments will continue its abysmal performance. Residential housing investments would be fine for the very long term, but with prices very elevated, risky for the medium term and vulnerable to interest rates eventually returning to more normal levels. Commercial property investments should continue to do well, i.e. property trusts etc. The share market should continue to do well but not quite as well as during 2019. International share markets should do better than our own, with the possible exception of the US market (although we have been cautious about the US market for a long time and so far, we have got it wrong).

In summary, things will proceed much as previously – we do not see much risk for a recession or a deterioration in the value of investments.