In 2019 we are moving into a year of slightly softer but still healthy growth. We think the US economy in 2018 grew by 2.9 per cent. This year we believe growth will slow modestly to 2.5pc and then to 2.0pc in 2020. After a headline CPI number of 2.0pc in 2018, we expect inflation to stabilise at around 2.5pc in both this year and next. We believe that the Federal Reserve shares the same view about the stabilisation of US inflation. It is for this reason that they have decided to adopt a patient approach to monetary policy and likely leave interest rates in the US unchanged at the current level until the outlook for the economy and inflation changes.
In Australia, growth is also slightly softer. We think that the Australian economy grew by 2.8pc in 2018. We believe this rises modestly to 3.0pc in 2019. Growth is then likely to soften a little in 2020 to about 2.8pc. These are still very high growth rates by the standard of a G20 economy.
Inflation in Australia remains soft at around 1.8pc last year. We believe inflation does rising slightly to 2.0pc in 2019 and then increasing to 2.3pc by 2020. It is worth remembering that inflation of 2.3pc is still within the RBA's target range of 2-3pc. This means that there is no need for any rate increases between now and the end of 2020. On the other hand, the outlook for gradual increases in inflation is likely to remove the RBA incentive for any reduction in rates. Therefore, we think interest rates remain at 1.5pc through to 2020.
Much concern has been expressed about a slowdown in the Chinese economy. While growth is slower, it is still spectacular in comparison to any other country. Growth in China appeared to slow to 6.4pc in calendar 2018. We forecast it will stabilise at 6pc in 2019 and 6pc again in 2020.
The end of calendar 2018 saw a savage sell-off in both the US and Australian stock markets. The cause of this was a sharp slowdown in earnings per share growth in the US market as the positive boost to US corporate earnings growth because of the cut in US corporate tax rates came to an end.
Interestingly by the end of February, both the US and Australian markets had recovered most of these losses. This recovery was mainly the result of the US Federal Reserve Bank announcing that they would hold off increasing interest rates any further for now, whereas previously the market had been assuming another three interest rate rises this year. At current levels, value is getting much harder to find again in markets.
After such a strong rise in the stock market in the first quarter, we think the market is entering a point where stock selection will be paramount in gaining returns. We have moved from a stock market to a market for stocks. With this in mind a key consideration should be your allocation towards growth assets such as shares that is suitable towards your tolerance for volatility.
- Justin Still, Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited ABN 49 010 669 726 | AFSL 235410
