Commonwealth Bank of Australia : 2017 outlook for markets and the economy

Michael Blythe, Chief Economist of the Commonwealth Bank, Stephen Halmarick, Chief Economist at Colonial First State Global Asset Management and Craig James, Chief Economist at CommSec share their thoughts.

Looking at prospects for the year ahead, Michael Blythe, Chief Economist of the Commonwealth Bank, says the balance of risks is shifting in a way that favours steady but not spectacular growth in the global and Australian economies.

'The proudest boast that an Australian economist can make is about our resilient economy and the 25-year growth expansion we have achieved. But the decline in GDP at the start of 2016/17 challenges assumptions about the sustainability of our growth momentum.

Fears that it is all too good to last are a persistent worry in Australian economic commentary. But much of the surprise drop in economic activity in Q3 16 looks temporary. And in a sense it should be easier for the Australian economy to sustain reasonable growth rates in the year ahead.

The major growth headwinds are easing. And some growth tailwinds are strengthening. The income drag from falling commodity prices has ended in spectacular fashion with the surge in key bulk commodity prices. The spending drag from falling mining capex will soon be complete. What lies ahead are the benefits of rising mining production and resource exports.

Economic growth in the year ahead will be about more than just the changing commodity story. The incipient infrastructure boom will become a more important driver of economic activity. Favourable weather conditions mean a farm 'boom' is underway. And the economy will continue to reap the benefits of rising Asian incomes. Sectors like agriculture, education, tourism, health and financial services will benefit.

There are still some risks, of course. The residential construction boom is approaching a peak. Business still remains reluctant to invest. Sluggish wages growth limits the ability of households to spend. And an ever expanding range of geopolitical issues mean the global backdrop remains as uncertain as ever.'

The biggest event for global financial markets in 2017 is likely to take place on 20 January when Donald Trump is sworn is at the 45th President of the United States, according to Stephen Halmarick, Chief Economist at Colonial First State Global Asset Management.

'The implications for the US economy and global financial markets from President Trump reflect our view that Trump's policies will be expansionary and stimulatory - especially his company and income tax cuts, increased infrastructure spending and reduced regulatory environment. These will be the primary factors driving markets throughout 2017.

Some parts of the Trump package, however, may not be as positive. There are risks of an increase in US inflation and we may see a more aggressive monetary policy tightening cycle from the US Federal Reserve. Potential trade restrictions are also a negative for global trade and global growth.

Higher inflation and higher interest rates and the risks associated with Trump's anti-trade policies could sow the seeds for an economic downturn late in Trump's Presidency, seeing equity markets and the US Dollar sell-off and bond yields rally again. But these are likely issues for 2018-2020.

After raising interest rates on 15 December by 25bp, to a new range of 0.5 per cent-0.75 per cent, we expect the US Federal Reserve to remain on a gradual tightening path in 2017. With the Fed unlikely to pre-empt the impact of Trump's fiscal policy easing, we expect only two further Fed rate hikes in 2017.'

Closer to home, Craig James, Chief Economist at CommSec, says that the Australian economy starts 2017 in good shape.

'Home building activity is solid in most states and this is, in turn, supporting the job market and consumer spending. Mining production remains strong although investment continues to ease.

The other support for the economy is coming from infrastructure spending by Federal and State governments, especially in NSW. The Reserve Bank believes governments have scope for even greater spending.

Economic growth is expected to pick up back towards 3 per cent during 2017.

The Reserve Bank expects inflation to gradually lift back towards the bottom of the 2-3 per cent target band over the next couple of years. A recovery in domestic activity and an improvement in global economic growth should lead to a modest uptrend in inflation. But at the other end of the equation, technology and globalisation will continue to cap inflationary pressures.

We think the Reserve Bank will stay on the interest rate sidelines in 2017. The Reserve Bank still has the ability to cut if inflation rates remain stubbornly low. But the Reserve Bank, under the new leadership of Dr Lowe, has made it clear it is not inclined to cut rates again, especially given an increased focus on financial stability. It still seems a little too early to contemplate rate hikes.

Unemployment is expected to slowly edge lower over the year, especially if economic growth picks up as we expect.

The Australian dollar has ebbed and flowed over 2016, responding to a raft of influences. These influences include higher commodity prices, lower Australian interest rates and varying expectations on US interest rates.

Over 2017, these same influences will dominate together with the fleshing out of economic policies by the new US administration. The AUD is likely to end the year lower than at the end of 2016, mainly as the USD strengthens.'