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Economic update by Macquarie Private Wealth
Australia's headline Consumer Price Index (CPI) rose 0.5% in the December quarter, slightly above market forecasts of 0.4%, according to the Australian Bureau of Statistics (ABS). The ABS data revealed that the annual rate of growth in the CPI was 2.1% to December, compared to a 1.3% annual rise to September.
According to the ABS, the most significant price rises this quarter were for fruit (+15.9%), domestic holiday travel and accommodation (+6.6%), house purchases (+1.0%), rents (+1.0%) and beer (+2.1%). Significant price falls were recorded in areas of automotive fuel (-2.8%), audio, visual and computing equipment (-7.1%) and pharmaceuticals (-5.3%).
Inflation as measured by the annual change in the CPI is a key consideration for Reserve Bank of Australia (RBA) monetary policy. The central bank strives, through amendments to the level of the official cash interest rate, to maintain inflation between 2 - 3% on average over time. However it should be noted that the RBA also studies the pace of underlying inflation, which removes volatile price movements, and averages two measures in the ABS data. The average underlying rate was 0.65% in the December quarter and 3.4% during the year to December.
Market expectation is for the level of underlying inflation and signs of a strong economic recovery to prompt the RBA to raise the official cash rate when it meets on Tuesday 2 February to deliberate on monetary policy for the first time in 2010.
Source: Iress and MPW Research
What lies beneath...
The start of a new year is usually a time when investors take stock of the past 12 months and consider what may come next.
2009 was an interesting year. It saw investors swing from despondency when the market reached low points, to feelings of greater confidence as globally-coordinated economic stimulus packages were put into place.
2009 started with growth asset markets continuing to be impacted for most of the first quarter, as investors were concerned that the emergency measures from monetary authorities and governments around the world would not be enough to avoid the depression scenario that had been priced into markets.
As it became clear that global governments were coordinated and serious in their efforts to improve financial and economic conditions, confidence returned. The US Federal Reserve effectively introduced a zero interest rate policy. The phrase "green shoots" came into common usage again to describe a potential global economic recovery. The prospect of a meaningful rebound in global economic growth began to be priced into markets with share and commodity markets making substantial gains from the March lows.
Inflation readings dropped as excess capacity was created by lower activity.
Now with 2009 behind us, what might 2010 have in store?
Macquarie's research team foresees a continuation of the recovery in global economic growth and further strengthening of emerging economies, in particular, during 2010. Under this scenario, the growth in equities and property, plus commodities should continue.
However, it's important to keep in mind that 2010 may not play out smoothly, with a number of risks to this growth scenario.
For example, subdued employment and credit conditions in most developed economies present a threat to economic recovery, particularly if economic stimulus is removed prematurely. In addition, individuals, corporates and governments continue to deal with debt-related issues, including sovereign risk.
Above all, as in any market environment, investors should benefit from retaining a diversified portfolio of quality assets, while considering exposures to the key areas of potential opportunity.
Keeping light on their feet is important, with investors being prepared to move to more defensive positions, if the risk above, or in fact others, rise up to threaten the projected growth scenario.
To discuss your investments or book in for an obligation free review, contact Glenn, Deb or Jennifer from Baker Affleck Financial Solutions 0n (07) 5538 3088
