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Economic Update

Evolving markets and policies

Despite the continued mixed global economic outlook, things are looking better into 2014, according to Stephen Halmarick.

In October 2013, the IMF revised the growth forecast to 2.9% this year and 3.6% in 2014. This isn’t disastrous, but definitely below trend according to Stephen Halmarick, Head of Economic and Market Research at Colonial First State.

United States
There are positive signs of a recovery in the US. This is evident in a few places but none more important than the housing market, which is a critical indicator of the health of the economy. After a big decline following the sub-prime mortgage crisis, house prices are rising along with an uptick in housing confidence. “The unemployment rate is declining nicely as well – all of these factors are contributing to the Fed’s willingness to start their QE3 taper.”

Some of this more optimistic outlook was threatened in October with the shutdown of the Government. In a last minute deal however, the Government shutdown was ended and the debt ceiling was suspended. The politics around funding the Government and raising the debt ceiling remains uncertain.

Europe also continues to recover according to Halmarick, but risks remain. “Financial markets have improved significantly in Europe, leading to a big reduction in financial risk. Politics is still a bit mixed. “On one hand we’ve seen a strong re-election of Angela Merkel in Germany, but on the other hand we have a 60% youth unemployment rate in Greece and Spain – a political problem waiting to happen. So we’re optimistic in the short term on Europe, but there are still long-term concerns for the region.”

So what about the most important global economy for us in Australia – China? The Chinese Government is targeting a growth rate of 7.5% this year, down to 7% over the next five years. While this is much lower than previous years, Halmarick believes it’s a stable and sensible target. “From an Australian perspective, we’re not seeing much evidence of a slowdown. China continues to grow and continues to consume more of our commodities. July imports of iron ore were actually the highest on record.”

In Australia, it’s all about the evolving sources of growth. The economy was growing at 2.6% in the year to June, which according to Halmarick is not fantastic, but not disastrous. “Australia has had 23 years of uninterrupted positive economic growth, which no other OECD country has achieved. But the key issue now will be finding a new primary source of growth to drive the economy, now that mining investment has peaked.”

One of those sources will be net exports and another will be business confidence. “Now that the election is out of way, business confidence is up. However, the real challenge will be translating that improved confidence into real activity. Issues like the carbon price, mining tax, paid parental leave and the company tax rate all need resolving” said Halmarick.

And finally, we’ll need to see an increase in residential construction, both high density and detached housing, which is an absolute necessity to drive growth. “In addition, more money needs to be spent on public sector infrastructure and transport, including roads, rail and telecommunications. We’ve seen some improvement, but we need to see more. This is vital for the housing market.”

Investment implications
Investors need to continue to diversify their portfolios. “We have a mixed global economic outlook, and markets remain challenged,” said Halmarick. “But as long investors continue to diversify and invest in the countries and companies that are facing the world’s growth, things will look better into 2014.”

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This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 12 October 2012. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

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