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Economic and Investment Update - March 2014

by Brendan Gallagher

Although the year didn’t start particularly well with most equity markets falling in January, the strong recovery over the remainder of the March quarter off the back of positive business results and economic data provides encouraging signs for the year ahead.

Economic News

As can be seen in the table below, Developing Economies in many parts of the world are expected to grow at a faster rate in 2014 and 2015 when compared with last year. Interestingly, Chinese growth is expected to slow from 7.7% last year to 7.4% in 2015 which, if compared to growth from a few years ago is slower, however if compared to the rest of the world, it is streets ahead in terms of growth.1

Real GDP
% yoy

2013 (a)

2014 (f)

2015 (f)

































Source for Australia: Average of RBA Statement on Monetary Policy, November 2013 and Australian Treasury Mid Year Economic Fiscal Outlook 2013-2014, December 2013
Source for others: Average of IMF World Economic Outlook Update, January 2014 & The World Bank Global Economic Prospects, January 2014

The biggest change can be seen in the developed economies which last year grew at a moderate 1.3% which is now expected to increase to 2.2%. Of these economies, the biggest contributor to this accelerated growth is the US which is expected to increase its growth from 1.9% last year to 2.8% in 2014.

The signs from the US are positive. Retail sales in the US have recovered strongly recently and unemployment continues to fall, down 1% over the past 12 months to 6.7%.  Housing Starts are likely to be a significant factor in sustainable growth in the US.  Housing Starts are a measure of the new residential construction. They are a solid lead indicator for growth in many parts of the US economy via their multiplier effect. Simplistically, a new house would be constructed in the current market providing builders, building suppliers, mortgage providers, real estate agents etc. with work, this in turn leads to further employment opportunities, increased consumer confidence, leading to more people taking the big plunge into home ownership.

Source: Deutsche Bank

The future of world’s largest economy dependence on the importation of oil and gas is quite dramatic. The substantial increase in the production of gas, predominantly from the development of shale gas resources, is so strong that the US economy is expected to be a net exporter rather than importer of oil and gas by 2035. With the cost of gas falling due to expanded domestic supply, input costs of many US manufacturers will fall and US consumers will no doubt have more dollars in their pockets with which to spend.

 Other large economies on the other hand are expected to increase their importation of oil and gas over this same period.

Source: EIA World Energy Outlook 2013

In Europe, the report card is quite mixed. Northern Europe continues to do quite well, with exporters having benefited by a relatively soft Euro, although this currency advantage is slowly reducing. Germany in particular remains the engine room of Europe, characterised by its lowest level of unemployment in decades (6.8%). In Spain, in some ways a basket case (unemployment above 25% for the past few years), the economy grew at the fastest rate in seven years.2 In France however the news has not been as positive with unemployment rising and the economy slowing.

Back in Australia, the news is quite good. Sectors of the economy sensitive to interest rates showed improvement, in particular retail sales and housing enjoying the continued low interest rate environment. Housing approvals in particular were strong with growth of 20% for the six months to 31 December 2013.3

Unemployment has recently ticked up a little to over 6% in February and may well increase further during 2014. Countering this is the expected increase in business activity and a lower Australian dollar which should flow through to stronger employment numbers towards the end of 2014 and 2015.

Australian Equities

The year started poorly with the Australian equities index falling 3%. As a result of improved economic data and improved company earnings, the market bounced back with a 4.92% increase in February and remained flat in March. The leading sectors were Consumer IT, followed by Financials, Industrials and Utilities.

International Equities

Global equity markets fell sharply in January and recovered strongly in February off the back of low interest rates and improved consumer and business confidence and accelerated economic growth. Global equity markets were flat in March.

The exception to this was the Japanese share market which actually fell in February following appreciation of the yen, a flattening of inflation and anticipation of increased sales taxes.

The outlook for international equities within developed economies is good, particularly given the current environment of: economic growth momentum, low interest rates and increased business and consumer confidence. For Australian investors this part of the market is particularly attractive given the expectation that the Australian dollar continues to depreciate against major currencies, as has been the trend over the past 12 months.


The Australian Real Estate Investment Sector (A-REIT) has enjoyed a modest increase in the March quarter. Residential housing however has experienced a significant lift, particularly in Sydney. Auction clearance rates are at levels not seen for many years and Chinese buyers are helping to lift the market. In December 2013 quarter for example, Sydney house prices rose by 4.9%.4

Cash and Fixed Interest

The RBA left interest rates at 2.5% in their meetings in February and March and it would seem that interest rates are expected to remain low for quite some time which is good news for those with a large mortgage but not good news for retirees who have a large allocation of their financial assets in term deposits.

Bonds have also continued to experience moderate returns and this is expected to continue in the short to medium term.

1  The Economist – Economic and Financial Indicators, March 22-28 2014, p84
2  Van Eyk Research – Investment Market Report Australia March 2014
3  Van Eyk Research – Investment Market Report Australia March 2014
4  Australian Bureau of Statistics – Property Prices Finish 2013 on a High, 11 February 2014.


April 4, 2014
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