PIMCO warns Australia would continue into another year of sluggish economic growth
Australia will be touching 100 quarters or 25 years of economic expansion without recession in 2016, but global fund bond manager PIMCO has warned against complacency as the investment climate in Australia appears to continue with its sluggish pace into the next year as well.
House prices are expected to rise by 2 to 5 percent in 2016 across all major cities, which will see a fall in demand in the housing sector. Low wages are expected to suppress the consumer enthusiasm next year. Executive vice-president and fixed income portfolio manager in Australia Adam Bowe has also warned against weaker business spending in the coming year as well.
“It certainly has been a remarkable run, particularly when you consider that only three isolated quarters during that period have experienced a contraction in real GDP, and one of those was related to the 2011 Queensland floods,” he said in a statement.
“With the extent of the macro headwinds Australia faces and the scope of the structural change in the economy as a consequence, we should be alert to the risk of a recession.”
He added, “However, over the next six to 12 months, we see plenty of evidence that the economy will be rebalancing rather than recessing, and that continues to be our baseline forecast for 2016.”
Bowe pointed out that even though the labour market is rebalancing and there is a rise in the business and consumer confidence, weak domestic demand and investment, low commodity prices and sluggish growth in the Chinese economy will force the Australian to remain below the trend. The situations may also lead the Reserve Bank of Australia to cut the rates further from the current 2 per cent.
Bowe has however pointed out that improvements in the labour market would not strengthen the consumer spending capacity. He also said that reductions in the interest rates by the RBA is unlikely if the sluggish state of economy shows signs of improvement.
"So with the market continuing to price in the chance of modest interest rate reductions, we do not see value in having large active interest rate positions in either direction. Instead, we think focusing on carry, or yield pickup, in portfolios will deliver the best risk-adjusted returns as we enter 2016,” he said.
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