Newspaper article Daily Examiner (Grafton, Australia)

The Economy's Big Issues

Newspaper article Daily Examiner (Grafton, Australia)

The Economy's Big Issues

Article excerpt

IS inflation dead? Have we seen the end of corporate pricing power?

When will the US start lifting interest rates?

Where should investors put their money?

CommSec's Big Issues Report 2015 finds the past year has been characterised by cautious consumers and businesses.

Spending, investing and employment have been relatively unremarkable. As a result, the economy has grown near, or slightly below the normal pace.

Unemployment has drifted higher and inflation has remained under control. The cash rate hasn't budged.

And the Aussie dollar has ebbed and flowed, but drifted lower over the second half of the year.

During 2014 the Aussie dollar tracked over a US14 cent range - from US80.89c to US95.04c. The currency is ending the year at the low end of the range and around US6 cents below the lower boundary of our forecast band.

The coming year may prove more of the same. Economic growth should stay close to 3% below the sort of growth that will cause unemployment to fall markedly.

Inflation should hold in the Reserve Bank's 2-3% target band. Risks are to the low end of the range in the early part of the year, held down by low oil prices.

As a result, the cash rate will not budge until the second half of 2015.

CommSec tips the Reserve Bank to start the "normalisation" process (lift rates) in August and follow that with another rate hike in November.

The risk is that the Reserve Bank does nothing. With solid productivity and population growth, arguably the speed limit of the economy is closer to 3.5-4.0%. And if the economy does pick up pace, inflation may not budge - influenced by lower oil prices and one of the key themes: absence of business pricing power.

One of the left-field questions is: if the speed limit does remain high, the economy drifts and inflation eases - not rises - does the cautious Reserve Bank conclude that this is a new era, and keep interest rates low?

The Aussie dollar should drift lower in line with softer commodity prices and a start to the rate-hiking process in the US. …

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