Declining commodities detrimental to economy

07-Apr-2016

By Daniel Paperny

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An ongoing decline in Australia’s terms of trade brought about by falling commodity prices would continue to negatively impact on the local economy this year, according to Fiducian investment manager Conrad Burge.

Australia’s terms of trade were down by 12 per cent in 2015, with national income measures “weak” for the past two years, Burge said.

According to Burge, the global economy was forecast to “strengthen marginally” this year as a result of the implementation of expansionary monetary policy in key jurisdictions.

However, he noted the potential for the global economy to “slip back” into a period of slower growth.

“As the International Monetary Fund put it in its recent World Economic Outlook Update, risks to the global outlook remain tilted to the downside,” he said.

In December last year, he said Australia’s international competitiveness was affected by elevated company tax rates, minimum wages close to the highest in the world, the growth of electricity prices, which had risen significantly since 2007, and excessive regulation that was restrictive to investment.

He said fears over the United States Federal Reserve raising interest rates “too soon and too quickly” had also spurred on a downward trend for most major share markets this year, though he admitted most markets subsequently were able to recover some ground.

From January 1 to March 28, Fiducian’s data showed global market movements included declines of 16 per cent for China, 10 per cent for Japan, 4 per cent for Australia, 2 per cent for the United Kingdom and 0.3 per cent for the US (S&P 500).

“Yields (interest rates) at first dropped sharply on perceptions that the Fed could be about to tighten policy too much and then moved higher as investors gained confidence about the economic outlook,” Burge said.

“[However,] valuations have improved and most share markets currently appear to be fairly priced, especially compared with other sectors … overall, most bond markets continue to look expensive.”

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