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US economy

Standing on our own two feet

Simon Curtain
Partner/Private Client Adviser
15 Jul 2013

The past few weeks have been a rocky ride for markets around the world and Australia is no exception. For the period January to mid-May, the Australian market increased 12 per cent, only to fall 10 per cent in the following 6 weeks. We now find ourselves back at square one with almost all of the year’s gains gone. 

So what happened to cause this? 

In short, the reason (or blame!) for this recent sell off rests with the US and China. 

Over the past few years the US economy has been printing money (or, to be technical, undertaking a quantitative easing strategy). Printing money lowers short term interest rates which in turn encourages banks to lend and consumers to spend. Over recent weeks the chairman of the Federal Reserve, Mr Ben Bernanke, has informed the market that the US plan to cease printing money at some stage in the next 12 months. 

While Mr Bernanke’s comments were actually a positive for the US – as the Federal Reserve believes the US economy is in good enough shape to stand on its own two feet – markets around the world failed to see the positive and reacted badly, wiping out most of the years’ gains. It’s a bit like taking a dummy away from a child – you know it’s the right thing to do and the child will be OK without the dummy, but the tantrums in the meantime can be horrendous! 

Similarly, over in China things have also been a bit shaky. Recent data from China suggests that growth in the world’s second largest economy is slowing and as result they will not continue to import huge amounts of materials from the rest of the world (and particularly Australia). What we find strange is the Chinese have been saying for months that they expect growth to slow and it is only now that the data is backing up this claim that markets are reacting. 

What is the likely outcome? 

While things have been rough in recent weeks we expect markets to adjust to this new norm. The Australian market has not been immune to these global events and we expect to see a shift in our local economy over the coming years as the falling Aussie dollar increases competitiveness in previously lagging industries like manufacturing, housing and tourism.  On the flip side we expect to see a slowdown within export reliant industries, like mining and resources (i.e. while the mining boom will end, other industries will pick up the slack). 

In addition, interest rates in Australia will continue to fall and should settle at around 2% – 2.25%. Lower interest rates will encourage consumers to spend, further propping up the economy. Lower interest rates also reduce the attractiveness of bank term deposits, encouraging investors to invest in other assets like shares and property. 

As always we continue to monitor the global landscape and identify opportunities over the short term while keeping in mind clients long term goals and objectives.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.