Reasons to be cheerful on the Global Economy

Don Stammer produces a list every year of X Factors .. for 2024 :::

The year now ending certainly had an abundant harvest of X-Factors, among them:

• The success of Donald Trump in winning the US presidency while Republicans hold a majority in both houses. Many people are still scratching their heads, wondering what the consequences might be.
• Over the last six years, the US has been by far the world’s best performing economy and the most innovative. In those six years, the US has not experienced a recession, though the National Bureau of Economic Research, which dates US recessions, says it spied a glimmer of one in 2022.
• What makes this clean record of zero recessions so mind-blowing is the many thousands of predictions that an imminent and severe recession was about to hit the US. A conga line of forecasters – many of them people who work in financial markets – has repeatedly claimed that the US economy would soon be upended by a major recession that would also cripple the rest of the world.
• In the early 1980s, Paul Samuelson, a well-known economist and author of the textbook that dominated macroeconomics in my undergraduate years, famously observed that “Wall Street has predicted nine of the past five recessions”. This time around, the gap between “Wall Street predictions made”, and “Wall Street predictions made successfully” is unthinkably wide and lopsided.
• Patient investors holding US shares and who ignored the naysayers have made attractive gains over recent years (and specifically in the last 12 months when average share prices have risen more than 20% and average dividends were increased).
• This year’s positive lead from US shares has also boosted prices in other share markets including the ASX, which reached record highs two weeks ago – something that would not have happened if our share market had been tracking just local factors.
• Another feature of 2024 has been the widely different views on how ‘sticky’ inflation is likely to be. For Australian investors, the two countries that matter for inflation are the US (where tariffs have been increased sharply and the budget deficit is 6% of GDP) and Australia (where wage demands are running at levels well above the rate of inflation and where productivity growth is negligible).
• In my view, underlying inflation in Australia could well be in the troublesome range of 4-5% in 2025 – a couple of notches above both prospective inflation in the US and the medium-term target of the Reserve Bank.
• The price of Commonwealth Bank shares has risen strongly in recent months, perplexing many advisors who had expected banks to suffer increasing losses on their housing loans. In my view, the gains in CBA share price reflect changes in the strategies of many fund managers, particularly among industry superannuation funds, which are now investing more of their clients’ money in exchange-traded funds that track the market and less in actively managed funds run-in house that aim to out-perform market returns through their stock selection. With the record of actively managed funds unimpressive when additional fees are charged, and with the CBA making up an impressive 8.2% of the ASX 200 index, the effect on that bank’s share price has been significant.
• In Australia, economic growth has slowed to near-zero rates over the first three quarters of 2024 despite the massive increases in spending by federal and state governments. The combination of our heavy reliance on variable rate debt when we borrow for housing, and the high levels of mortgages taken on during the extremely low interest rates of the pandemic period, have caused severe financial pain for many mortgagees.
• The Federal Treasurer has made it clear he would like the Reserve Bank to reduce its cash rate to ease theses strains, blaming the Reserve Bank for ‘smashing’ the Australian economy by leaving its cash rate unchanged while other countries have cut their rates. Unsurprisingly, the Reserve Bank Board suggests (my words here) it awaits convincing signs that inflation is on the way down with reasonable prospect of return to the target range over the next year to 18 months.
• The Chinese economy has also slowed, mainly because of the cutback in bank lending and the strains on bank balance sheets after the housing market collapsed from oversupply a couple of years ago. The Government has eased monetary and fiscal policies to stimulate growth, but most commentators say more needs to be done to lift growth to the target rate of 5%. Nonetheless, Chinese share markets have made some useful gains, with the price of FXI, the exchange traded fund made up of large companies listed on the Shanghai Stock Exchange having risen by 33% in the last 11 months, including a one-day move of +9% in the last fortnight.

And this year’s winner of the X-Factor award is …

The US economy is in its sixth year without experiencing recession, despite the many predictions of an imminent and deep economic downturn.

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