After a turbulent start, a relatively stable global environment is forecast for 2016, with growth to remain tepid. Recessionary pressures in China and other emerging markets as well as widespread volatility all feature in the current global economic climate.
On 24 June the world was shocked when Britain voted to leave the European Union. The EU is a political and economic partnership between 28 European countries, formed after World War II. The idea was that if everyone was involved in a single market they could strengthen and support one another’s economies, which would also mean they were less likely to go to war again. The actual ‘Brexit’ is likely to take a few years to play out; Prime Minister David Cameron (or his successor) will need to give formal notice of Britain’s intent to leave (by way of ‘Article 50’), which will be followed by a period of negotiation regarding the terms under which the exit will occur and their implications for both the UK and Europe.
Despite expected global economic stabilisation providing a favourable environment for equities, above average levels of volatility look set to continue. Various factors such as ultra low interest rates instigated by central banks, high levels of household debt, aging demographics, the BREXIT and China’s transitioning economy will all continue to impact the global environment moving forward.
Ongoing concerns regarding China and the trajectory of the global economy weighed heavily on consumer confidence at the beginning of 2016, resulting in a significant drop in global risk assets and negative returns in January. However, a manic March, thanks to a steady US economy and easier global monetary policy, saw a resurgence in the market, almost cancelling out the losses seen earlier in the quarter.
The RBA cash rate remained at a record low of 2% for the first quarter of 2016 before being lowered to 1.75% at the beginning of May. Current domestic economic indicators are still positive, with our lowest unemployment rate in two and a half years, business lending rising at its fastest pace since the GFC and our best growth rate in more than three years. We have also seen improved retail sales and close to record high levels of residential construction and tourism income. However, long term predictions see a potential further rate cut to 1.5% with the key focus considered to be achieving targeted inflation rates (between 2-3%), rather than growth. The impact of Brexit may also force the hand of the RBA to cut rates further.