Grow Magazine

What you need to know about 2017

December 2016

How housing, the economy, the dollar and the Trump effect will play out next year.

Jason Murphy rounds up what's in store for housing, the economy and more in the new year.

Key points

  • Australian economic growth should be OK.
  • House prices are expected to grow 2 per cent, nationally.
  • There's expectation of economic growth from new US policies...
  • …just as there’s considerable uncertainty and risk from those same policies.
  • As the US increases rates the Australian dollar should keep declining.

Lower house price growth

Australia’s property market achieved record valuations in 2016. Can it do it again in 2017? Or will a slide in prices spread across the country from the markets where it has so far been contained: Perth and Darwin (down 4 per cent and 7 per cent respectively in the year to September 2016).

“We think overall that you will get a moderation in prices over the next 18 months or so,” says Felicity Emmett, head of Australian economics at ANZ. “So, we’ll still get ongoing price gains but they won’t be as strong as what they have been in 2016 and the prior years.”

“By the end of 2017 we think overall prices will be up around 2 per cent. A little bit more in some centres and a little bit less in others.”

The Reserve Bank has raised continued warnings over the state of the apartment market in an analysis in October 2016.

“The large number of new apartments recently completed and currently under construction in many capital cities raises the risk of a marked oversupply in some geographic areas,” it wrote in an analysis in October 2016.

Price appreciation in houses has outstripped that in apartments in 2016. In the eight capital cities, house prices rose 4.1 per cent, and attached dwelling prices rose more slowly at 1.7 per cent. And yet still more new apartment supply comes onto the market in the new year.

House prices, auction clearances 2009-2017

Source: CoreLogic RP Data, ANZ Research

Economic growth not good, not bad

Will the Australian economy be able to recover from the months of negative growth that blighted performance in 2016?

ANZ’s Emmett says in 2017 the protracted collapse of the mining boom will finally end, delivering some relief, but economic growth in the rest of the country will remain tentative.

“Non-mining business investment is likely to grow modestly, with strength concentrated in New South Wales and Victoria, and Queensland and Western Australia stabilising,” she wrote in a note to clients.

Reserve Bank of Australia forecasts suggests there’s no need to panic – another somewhat ordinary year is ahead.It forecasts economic growth of between 2.5 per cent and 3.5 per cent, encompassing ANZ’s forecast of 2.8 per cent growth.

The International Monetary Fund sees growth of 2.7 per cent, just below its 2016 forecast of 2.9 per cent. These three forecasts agree the year ahead will be not especially good, but not too bad.

That remains the most likely scenario. But a range of novel and hard-to-predict forces are affecting the global economy. Watching risks closely will be key during 2017. Uppermost among these are political risks.

Figuring out President Trump

The year will really start with the inauguration of Donald Trump as president of the US, on January 20, 2017.

The market reaction to Trump’s election has been positive in the dying phases of 2016, with the chief index of the US sharemarket, the US Dow Jones Index, approaching a record 20,000 in mid-December 2016.

Australian, world share price indices

Source: Bloomberg, MSCI, RBA

A widely-accepted explanation for the positive market reaction to Trump is his promise of great fiscal stimulus in the US economy – $US1 trillion on infrastructure, plus tax cuts. Whether that stimulus plan survives the attentions of budget hawks in the US Congress remains to be seen.

“Republican congressional support for his policies is not assured,” wrote ANZ senior international economist Tom Kenny and ANZ head of global economics Brian Martin in a note to clients.

Trump’s presidency sows risk across the world, principally related to trade, write Kenny and Martin in the note, ANZ Research Quarterly, released on December 6. He has pledged to label China a “currency manipulator” and impose tariffs on imports from that country.

“In the worst-case scenario, the imposition of tariffs by Trump could lead to a global trade war which would result in lower world growth,” Kenny and Martin argue.

They also counsel watching the European Union for political risk. Elections in 2017 in the Netherlands, France and Germany give populist parties an opportunity to upset the established order.

A lower-value Aussie dollar

ANZ argues policy rates could rise in the US as Trump’s fiscal stimulus lifts inflation in an economy already near to capacity. ANZ forecasts US official rates to rise to 1.25 per cent by the end of 2017.

The US Federal Reserve lifted rates on December 14 by 0.25 per cent, and said it expected three more of these in 2017.

At home, no change is expected, with the RBA’s cash rate likely to sit at 1.5 per cent, according to ANZ forecasts.

Rates rising in the US but not Australia is a pattern that can lead to currency movements. And that’s exactly what’s happened since December 14, with the US dollar only taking two days to reach a 14-year high. ANZ forecasts a falling Australian dollar against the US currency, dropping to US68¢, from its current level around US74¢.

These forecasts are not certain though, and once again, political risks might mean the US dollar doesn’t strengthen as much as expected.

“If Trump does prove to be erratic, a political risk premium for the dollar could be required,” argue Kenny and Martin.