Vaccine hopes surged Global shares rose 7.7% and 12.2% in hedged and unhedged terms, respectively.…
2016 brought many surprises but none so as great as BREXIT and the election of Donald J Trump to the Whitehouse, now President Trump. 2017 has started with a bang and as we look ahead what does 2017 have instore for us?
Since taking office President Trump has already withdrawn from the Trans-Pacific Partnership (TPP) trade deal, has put a government freeze on hiring, regulations, and public communications and slashed or blocked immigrants from seven countries entering the US. He has also issued an executive order telling agencies to waive or grant exemptions from Obamacare fees and regulations “to the maximum extent permitted by law” signalling the beginning of Obamacare being dismantled, something he promised to do his first 100 days of office. It is likely that we will see it dismantled piece by piece rather than just nullifying it as it would affect too many citizens negatively if it was repealed.
Since the election of Donald Trump, the Australian share market rose 370 points (5,295 points to 5,665) or about 6.99%, driven by an increase in commodity markets. President Trump’s commitment to building the wall between the USA and Mexico has increased the demand for raw materials, benefiting our economy. What is unknown is whether President Trump will forge ahead with his threat to imposed large import tariffs on Chinese goods. This could affect the Australian economy given our close trade ties with China.
President Trump has also indicated he intends to stimulate business investment in the US by reducing the company tax rate to 15%. This could put more pressure on Australia to reduce its company tax rate. Australia is currently out taxing the majority of the other Organisation for Economic Cooperation and Development (OECD) countries, making it one of the least desirable places for investment. Without tax cuts and a reduction in red and green tape, corporate Australia could be less competitive on the world stage, with a knock-on effect to jobs and growth.
Possible Big Changes In Europe
There are big elections in Europe this year. Participation in the European Union (EU) is a hot election topic across several countries. The European Union “could fall apart” according to The German Vice Chancellor and Economy Minister Sigmar Gabriel, if populist parties get into power in France or the Netherlands. Depending on how the elections play out in each country there is speculation that it could be the beginning of the end for the EU.
The Netherlands Election
The Netherlands (Dutch) election is on 15th March 2017. Geert Wilders and his anti-immigration party has been leading in the polls for some time and is looking likely as the winner. The Netherlands was a founding member in of the EU in 1993 however one of Wilders’ key election policies is to exit the EU.
 (Rem Korteweg, senior research fellow at the Centre for European Reform (CER), believes that there is an 80 per cent chance that the Mr Wilders will win.)
The first round of the French presidential election will be held on April 23. Former prime minister Francois Fillon will be the Republican party’s candidate, standing against the far-right Front National Party’s Marine Le Pen and a field including an as-yet unchosen socialist candidate. If no candidate wins an outright majority, the top two will go head-to-head in a second vote on May 7. Currently Le Pen is leading the polls. Her win could initiate another Brexit like event as a key election policy of Le Pen is to exit the EU.
Germany’s election is on 22nd October 2017 and is not expected to be as dramatic as the other two nations, however the balance of power could shift to the center right party. Nonetheless, it does not mean that Germany is safeguarded from substantial change if there is a swing to the populist parties. According to Sigmar Gabriel, Germany risks becoming “isolated” if the EU were to disintegrate as its economy would greatly suffer if it lost partners vital for open-border transactions due to its reliance of exports.
Brexit has passed its first major legislative hurdle 498 votes to 114, empowering Prime Minister Theresa May to start removing Britain from the EU. This legislation gives Prime Minister May the right to trigger article 50 of the EU’s Lisbon Treaty. The self-imposed deadline for triggering two years of EU divorce talks is March 31. It is expected that pro-EU members of Parliament will continue to oppose the exit and will try to insert more amendments at the next stage of the process.
With the possibility of Britain, the Netherlands and France leaving the EU there is a significant chance that the economic landscape of the EU could change considerably in 2017.
Australian Federal Budget
It is expected that the federal government will soon be forced to lift its own self-imposed credit limit in 2017 with the gross Commonwealth debt reaching more than $474 billion, just shy of the $500b debt ceiling. This is a concern as continuing to increase the debt ceiling is unsustainable and puts more pressure on Australia’s AAA credit rating. The loss of the AAA rating could mean big problems for Australian home owners and the government as it would increase the costs of financing for the banks and in turn trigger increases in interest rates for home owners and the tax payer.
The budget is due to be released on the second Tuesday in May 2017. Treasurer Scott Morrison has stated “on the best information we have available to us, the government’s plan to return the budget to balance is projected to be in 2021 and that is something that says our plan remains on track”.
Slow economic growth, high unemployment, low wage growth and restrained business profits and investment could dampen the budget. Commodity prices are currently buoyant; however, any volatility could threaten the economic outlook.
SOURCE: Australian Office of Financial Management
Australian Property Prices and Interest Rates
The REA Group Property Demand Index reached its highest level recorded in 2016 and this high level of demand is expected to stay in 2017 nationally (though will vary between states) driven by a surge in the number of people looking for property. Demand from China for property in Australia remains strong with these developers and buyers increasingly linked to new developments in our capital cities.
According to Rodger Montgomery “Australian householders are vying for gold in the debt Olympics”. Household debt relative to disposable income is currently 187% and household debt to GDP is 125%. The current low interest rate environment has spurred on Australia’s love of property. However, with the current low interest rates, banks feel less pressure from the monthly decisions made by the Reserve Bank of Australia (RBA). In 2017 it’s possible that the RBA will hold interest rates but that the banks will continue to restrict lending by raising rates, particularly for investors. Additionally, with the looming threat of Australia losing its AAA credit rating, banks have slightly increased mortgage rates which is a potential indicator that era of low rates is ending.
Digital Finance Analytics examined mortgage stress, conducting a survey of 26,000 Australian households. It analysed how much ‘wiggle room’ households have if faced with increasing interest rates considering income, mortgage size, position of mortgage (ahead or behind on repayments) and other financial commitments. The results indicated that up to 24% could face mortgage stress if rates moved just 1%.
2017 may be a good time to review your mortgage and its structure.
Superannuation changes, passed by both houses of parliament on 23 November 2016 will come into effect on 1 July 2017. The Coalition announced plans to reduce concessional and non-concessional contributions as part of the 2016 Federal Budget and are now law, reducing:
- the over-50s concessional contribution cap from $35,000 to $25,000 and the under-50s from $30,000 to $25,000
- the annual non-concessional contribution cap from $180,000 to $100,000
These changes are set to impact those getting ready for retirement the most.
2017 is going to be an interesting year to watch, with President Trump’s actions and the fate of the EU being some of the biggest protagonists in the world show. The knock-on effect of changes in the US and Europe has the potential to effect Australia in positive and negative ways. Only time will tell which way they fall.