The next 12 months are likely to be a case of deja vu for the world economy, with the problems of 2005 still posing a risk.
Bond yields, which are the driver of global economies, are unsustainably low, according to MLC implemented consulting general manager Dr Susan Gosling.
“The markets appear to have factored in a highly pessimistic economic scenario,” she says.
“If things turn out to be more positive, this should be good for global shares but negative for bond markets.”
Gosling says the Australian economy is slowing as consumers keep a firmer grip on their money. But this is tempered by a booming Chinese economy, which is good for the local outlook.
However, there are signs the Chinese economy is moderating, which could have an impact on commodity prices.
“The source of the slowdown may lie in the move to a more market-orientated banking system,” she says.
“While this may cause a commodity price reversal, in the longer term avoidance of a boom-bust cycle is a positive.”
In the past, a high oil price usually led to economic misery for countries such as Australia, but the oil price rise in 2005 has not had a significant impact on the economy.
“Oil prices are not as important as they used to be as industry becomes more efficient in using commodities,” Gosling says.
Alternatively, in the US there has been a change in the balance of labour and capital expenditure.
“A high share of profit is going to capital and that has had an impact on the US market, which is leading us to believe we are in the late stages of a traditional economic cycle.”
Gosling says risks may come through at this late stage of the cycle, but some are tempered with positives in the global economy.
The risks include the US Federal Reserve raising rates much more than expected. In December, 25 basis points were added to the figure. Gosling says this will slow the US economy and the knock-on effect will hit our local economy.
Another risk is a serious outbreak of Asian bird flu, which could hit the markets Australia depends on.
On the positive side, the global imbalance could start to correct with Japanese consumers regaining their confidence and European economies starting to improve while US consumers curtail their spending.
However, the US deficit keeps rising — and that probably won’t change in 2006, she warns.
