With luck, investor confidence will take over

All things considered, Craig James believes 2013 has quite a rosy hue

Craig James

JOHN TIEDEMANN

OVER THE PAST FEW YEARS THE economic environment has either been characterised by “crisis” or “recovery from crisis”. With any luck, it will be a different story in 2013 – a more “normal” year if you like, whatever that means.

Sure, the problems haven’t all been solved but there is a greater determination by policymakers and politicians to deal with issues quickly and move on.

Overall, the global economy will probably grow by around 3.5% in 2013 after growth of around 3.3% in 2012. When you consider that “average” growth over the past 30 years is 3.3%, that outlook is reasonably encouraging.

CommSec’s not expecting big things from Europe though – and to a large extent that goes for the next few years. High budget deficits need to be brought under control to stabilise debt while at the same time getting economies growing again.

But if the US, China and other emerging economies are successful in achieving stronger growth over 2013, any softness in the European economy can be absorbed. And generally that is what CommSec expects. China is already well into recovery from its engineered slowdown.

In the US, housing and export sectors are leading the way forward. The missing ingredient is a stronger job market but that should emerge when consumer and business confidence is restored.

A better global environment will certainly support further gains in sharemarkets, with resources stocks expected to be key beneficiaries in preference to defensive and yield-driven stocks and other sectors that tended to do best in 2012.

Every year has its fair share of surprises and 2013 will be no different. And perhaps in a year’s time we will be talking about the emergence of China boom mark II. It has to be remembered that China is only in the early days of its journey down the path of industrialisation and urbanisation. And given its 1.3 billion people it is development on a scale the world has never witnessed.

In Australia, another year of expansion is expected – the 22nd straight year without a recession. Economic growth should hold in the “normal” range of 2.5% to 3.5% with inflation contained between 2% and 3% and unemployment hovering around 5%. Arguably Australia is entering 2013 in the strongest state of any advanced economy. We expect stronger contributions from home building and consumer spending – and commercial construction lifting later in the year. But if Chinese growth proves stronger than expected, as CommSec suspects, mining will remain in the limelight.

Overall we expect that investors will become more confident and look for higher returns outside cash. If the improvement in confidence continues as the global economy stabilises, shares and property will be favoured by investors. The S&P/ASX 200 should end the year at around 5000 points, with total return on shares up by around 10%.

Interest rates are trickier. The Reserve Bank may lean towards rate cuts early in the year, but then lean towards rate hikes later in the year as economic momentum builds. The cash rate is expected to range between 2.75% and 3.5%.

And one complication may come from a strong currency, with the Aussie tipped in a range of US100¢ to US112¢. In the first half of 2013 CommSec can envisage a scenario where European issues recede, US economic recovery consolidates and Chinese growth lifts. If the good news eventuates, then the Aussie dollar could push to the high end of the range.

Of course, that may not be what the Reserve Bank wants to see, raising the risk of another surprise – a battle between the RBA and the Aussie dollar.

Craig James is CommSec’s chief economist.

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