17/12/19
From George Lucas, Raiz CEO
2019: a ‘dramatic’ year in review
This week is an ideal time to reflect on the events of 2019. It’s certainly been an eventful year, including mounting fears of a global recession, turnarounds by the US Federal Reserve and European Central Bank on monetary policy, and the escalation of the US-China trade war.
Elsewhere, it’s been dramatic in the UK where two Brexit deadlines have come and gone, the US economy weakened by more than expected and the eurozone economies slowed, while the Chinese economy has held up a bit better than forecast over the past 12 months.
Despite the geo-political drama, asset prices have risen across the board, with global bonds rallying and equity markets hitting new highs. The reason for this seems to be that equity markets are taking their cue more from central banks than the real economy and growth in corporate earnings.
Indeed, the speed and the scale of the response by central banks this year suggests that policymakers are more attuned to downside risks to growth than the market previously thought.
Swift Brexit resolution unlikely
In the UK, the big general election win by UK Prime Minister Boris Johnson’s Conservative Party now means that the Withdrawal Agreement will pass UK parliament — a significant step towards Brexit.
Nonetheless, a major break-through on trade or a swift resolution of Brexit next year is still unlikely given the election win sets up a new cliff edge at the end of next year when a free trade deal with Europe will have to be agreed.
Signs of global recovery on horizon
Looking ahead, there are signs that the global economy is slowly stabilising, helped by monetary policy moves and it’s my view that we will start to see global growth recover in late 2020.
In the US, the Fed, which cut interest rates three times this year, will probably leave rates unchanged for the foreseeable future as inflation globally doesn’t seem to be an issue.
Australian economy tipped to remain weak
In Australia, economic growth is probably bottoming out but wage growth is likely to remain weak in the period ahead. Annual GDP lifted to 1.7 per cent in the September quarter, but still remains well short of what is needed to drive down unemployment and boost wages.
If this scenario continues, the Reserve Bank of Australia will have room to cut rates to 0.25 per cent early next year and launch quantitative easing, which markets have yet to factor in. Any strength in the Australian dollar will cause this to happen sooner as the RBA knows that movement in the currency is a much more effective stimulus tool than interest rates.
The Australian dollar is linked to commodity prices and, like other asset classes, oil and commodities have fared better than expected recently, putting upward pressure on the AUD. If this trend continues, the RBA will likely look to monetary policy to help weaken the local currency.
Indonesia: central bank open to more rate cuts
Finally, Bank Indonesia’s Deputy Governor Dody Budi Waluyo recently indicated that the central bank remains open to more interest rates cuts after this year’s four rate cuts.
Similar to Australia, we will probably see a 25 basis-point cut by Bank Indonesia as the Indonesian rupee continues to perform well against the US dollar.
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