The World In 2007 (According to CommBank)
As is the case every December, those in the market begin to make their predictions for the year ahead. The latest is the Commonwealth Bank's economics team, which has released its Economics Prospects report for the December quarter.
Looking first at world growth the bank sees the outlook as solid, as while weakness in the US economy continues there is offsetting strength elsewhere. Ongoing weakness in the housing sector is causing most of the problems in the US economy, the bank noting it has recently led to cuts in consensus growth estimates for both this year and next. Growth in 2006 is now forecast at 3.3%, down from 3.4% previously, slowing to 2.5% in 2007 against 2.6% previously.
Japan is not one of those providing the offsetting strength, the bank noting it is currently in a mid-cycle slowdown. The bank estimates GDP this year will be 2.7%, slowing to 2.0% next year. It is worth noting though this still represents strong growth for the Japanese economy compared with its performance over the past decade.
Europe has been stronger than expected this year, with growth likely to come in at around 2.6%. While this is expected to slow to around 1.9% next year there remain some positives, the bank estimating unemployment and inflation will fall slightly in 2007.
Growth in China should stay strong, though the bank's forecast of 9.3% is down from this year's 10.5%. It goes without saying that compared to growth elsewhere, the Chinese economy remains very strong.
Turning to Australia, the bank notes GDP was up 2.2% in the year to September, the drought impacting by cutting rural GDP by as much as 10%. Its forecast is for growth in 2006/07 of 2.5%, rising to 3.6% in 2007/08.
CommBank sees no change to the divergence in growth rates across the various states and territories, as those states with exposure to commodities (Western Australia, Queensland and the Northern Territory) should continue to enjoy stronger conditions than the rest of the country, particularly as they are also enjoying the strongest population growth.
The record terms of trade stemming from strong commodity prices has had a positive effect on profit and income growth, this allowing business to continue to increase its level of investment. There are positive implications from this in the bank's view, as the increased investment will lift capital stock, so helping alleviate the capacity constraints that are driving up inflation. Also positive for the inflation outlook in the bank's view is outlook for productivity, which is tipped to accelerate at the same time as unit labour cost increases slow.
It may take some time for this to be reflected in the official figures though, as the bank expects underlying inflation to remain above 3% in the first half of next year. Despite this it sees the Reserve Bank of Australia (RBA) as keeping official interest rates on hold through at least September, though it suggests the risk remains to the upside given the inflation pressures.
On the bank's estimates the Australian dollar is likely to range trade against the US dollar in coming months, though in global terms it expects the US dollar to continue its recent decline against currencies such as the euro and the British pound given the outlook is for further slowing in the US economy, increasing the speculation the Federal Reserve will move to cut interest rates. Against the greenback the bank sees the Aussie dollar as ranging between US75c and US80c.
Residential construction in Australia is expected to get a lift thanks to continued population growth and the impact this is having in driving down vacancy levels. The bank also notes strong jobs and real income growth is providing a boost for the sector.
While there is speculation commodity prices could come under pressure as the US economy slows the bank tends to disagree, as it expects demand for metals will remain strong as growth in the major base metal importing companies should remain above that of the US.
Not all metals are equal though particularly in terms of the likely supply response, so the bank sees nickel as likely to move lower next year even as prices for zinc potentially increase.
Rural commodity prices are also likely to be impacted by supply and demand conditions, the bank noting while wool prices have stalled at recent highs supply remains limited, so risk remains to the upside.
Equity markets have enjoyed another vintage year in 2006, the bank suggesting while further gains can be expected next year the rate of increase is unlikely to be the same as it has been in recent years. Its forecast is for the S&P/ASX200 index to reach 6,000 by the end of 2007, a gain of around 10%.
:tea:
As is the case every December, those in the market begin to make their predictions for the year ahead. The latest is the Commonwealth Bank's economics team, which has released its Economics Prospects report for the December quarter.
Looking first at world growth the bank sees the outlook as solid, as while weakness in the US economy continues there is offsetting strength elsewhere. Ongoing weakness in the housing sector is causing most of the problems in the US economy, the bank noting it has recently led to cuts in consensus growth estimates for both this year and next. Growth in 2006 is now forecast at 3.3%, down from 3.4% previously, slowing to 2.5% in 2007 against 2.6% previously.
Japan is not one of those providing the offsetting strength, the bank noting it is currently in a mid-cycle slowdown. The bank estimates GDP this year will be 2.7%, slowing to 2.0% next year. It is worth noting though this still represents strong growth for the Japanese economy compared with its performance over the past decade.
Europe has been stronger than expected this year, with growth likely to come in at around 2.6%. While this is expected to slow to around 1.9% next year there remain some positives, the bank estimating unemployment and inflation will fall slightly in 2007.
Growth in China should stay strong, though the bank's forecast of 9.3% is down from this year's 10.5%. It goes without saying that compared to growth elsewhere, the Chinese economy remains very strong.
Turning to Australia, the bank notes GDP was up 2.2% in the year to September, the drought impacting by cutting rural GDP by as much as 10%. Its forecast is for growth in 2006/07 of 2.5%, rising to 3.6% in 2007/08.
CommBank sees no change to the divergence in growth rates across the various states and territories, as those states with exposure to commodities (Western Australia, Queensland and the Northern Territory) should continue to enjoy stronger conditions than the rest of the country, particularly as they are also enjoying the strongest population growth.
The record terms of trade stemming from strong commodity prices has had a positive effect on profit and income growth, this allowing business to continue to increase its level of investment. There are positive implications from this in the bank's view, as the increased investment will lift capital stock, so helping alleviate the capacity constraints that are driving up inflation. Also positive for the inflation outlook in the bank's view is outlook for productivity, which is tipped to accelerate at the same time as unit labour cost increases slow.
It may take some time for this to be reflected in the official figures though, as the bank expects underlying inflation to remain above 3% in the first half of next year. Despite this it sees the Reserve Bank of Australia (RBA) as keeping official interest rates on hold through at least September, though it suggests the risk remains to the upside given the inflation pressures.
On the bank's estimates the Australian dollar is likely to range trade against the US dollar in coming months, though in global terms it expects the US dollar to continue its recent decline against currencies such as the euro and the British pound given the outlook is for further slowing in the US economy, increasing the speculation the Federal Reserve will move to cut interest rates. Against the greenback the bank sees the Aussie dollar as ranging between US75c and US80c.
Residential construction in Australia is expected to get a lift thanks to continued population growth and the impact this is having in driving down vacancy levels. The bank also notes strong jobs and real income growth is providing a boost for the sector.
While there is speculation commodity prices could come under pressure as the US economy slows the bank tends to disagree, as it expects demand for metals will remain strong as growth in the major base metal importing companies should remain above that of the US.
Not all metals are equal though particularly in terms of the likely supply response, so the bank sees nickel as likely to move lower next year even as prices for zinc potentially increase.
Rural commodity prices are also likely to be impacted by supply and demand conditions, the bank noting while wool prices have stalled at recent highs supply remains limited, so risk remains to the upside.
Equity markets have enjoyed another vintage year in 2006, the bank suggesting while further gains can be expected next year the rate of increase is unlikely to be the same as it has been in recent years. Its forecast is for the S&P/ASX200 index to reach 6,000 by the end of 2007, a gain of around 10%.
:tea: