Boom or bust?

We start the New Year with an economic outlook

Despite the many doomsayers, we are cautiously optimistic regarding the global growth outlook in 2014. While returns are likely to be lower and more volatile than in 2013, the year ahead should be positive for investors – particularly those with exposure to growth assets – as monetary conditions remain relatively easy, fiscal policy loosens and global economic growth continues to recover.

Easy monetary conditions

As a result of the 2012/13 slowdown in growth, spare production capacity remains immense and inflationary pressures are therefore likely to remain low. Consequently, global interest rates are also likely to remain low in the medium-term:

Fiscal reins loosen

The drag on global growth from fiscal tightening is receding from around 1.3% of gross domestic product (GDP) in 2013 to around 0.7% of GDP in 2014. Fortunately, the big fiscal tightening in Europe and the US is largely behind us.

Global economy recovers

Global economic growth is likely to increase to around 3.5% from 3% in 2013. Currently economic growth forecasts range from 1% in the Europe, 1.5% in Japan, 3% in the US and 5% in the emerging world with China at 7-7.5%.

What’s Australia’s outlook?

In Australia, the combination of a housing recovery, gradually improving confidence, a pick-up in non-mining investment and stronger global growth are expected to result in growth pushing up to around 3% by the end of 2014.
Inflation is likely to remain benign and the Reserve Bank of Australia (RBA) is expected to keep the cash rate on hold at the current historical low of 2.5% for at least the first half of the year. A possible interest rate hike later in 2014 could see the cash rate end the year at 3%.

What does this mean for investors?

Improving global growth, coupled with low inflation and low interest rates, provides a positive backdrop for growth assets such as shares in 2014. However, with shares no longer dirt cheap (and more dependent on rising earnings), returns may be lower and more volatile than those we saw in 2013.

Conversely, defensive investments such as bonds and cash will remain under pressure as investors continue to switch out of these asset classes in favour of more growth-oriented opportunities.

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Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.