Economic outlook - Autumn 2016

Less of the same in 2016.

Low growth, low inflation, flat sharemarkets and a falling Australian dollar are set to continue into 2016, according to forecasts from some of Australia's leading economists.

However, according to BT Financial Group Chief Economist Chris Caton, it will be a case of "less of the same" in 2016.

"Australia will continue to experience the drag on growth from the adjustment to falling mining capital expenditure and lower income from commodities but the rate of decrease will slow," he says.

"Where inflation last year was low and falling, this year it is likely to remain low but start rising. Growth will remain low but is likely to be higher than last year. The Australian dollar is likely to continue to fall against the US dollar but the rate of decrease will slow.

So the themes are similar but it is more akin to ‘less of the same’ rather than 'more of the same'.”

Mr Caton is cautious about Australian shares in 2016, forecasting mid to high single digit returns, although more optimistic than many of his economist peers who on average predict a flat or falling sharemarket over the year, according to the recent Business Day Economic Survey of 26 leading Australian economists.

"Markets are not cheap by any measure but they are reasonably good value at current levels," Mr Caton says.

"Smarter heads than I calculate that the US sharemarket is currently factoring in a 60% chance of recession. If the chance is less than that, which I believe it is, equity markets are almost certainly good value."

Mr Caton also believes the Reserve Bank is likely to respond to improving economic data by increasing interest rates twice in 2016 to finish the year at 2.5%. On the other hand, as you can see from the table below, most economists have tipped a cut to official interest rates in 2016, with the average of the 26 economists surveyed by Business Day forecasting a slight fall.

Mr Caton believes the unexpected strength in economic data is likely to stem from sectors such as tourism and education services which benefit from the weakening Australian dollar.

House prices in Sydney and Melbourne are also tipped to rise in 2016 by the panel of economists, albeit at a much slower rate than the 11% plus rises in 2015. Many point to the tightening of lending practices for investment properties and housing affordability as the major factors in the cooling off.