Global economy gaining strength

Greg Easton
Greg Easton
The global economy has steadily improved in recent months and this year starts on a much more solid foundation than seen for some time, Craigs Investment Partners broker Greg Easton says.

Growth in most regions was stable, if not accelerating; central banks remained committed to providing support where necessary and the corporate world was growing earnings.

However, the recovery was still fragile and in the coming year returns could be more modest than last year's, he said.

The Federal Reserve had started reducing its bond-buying programme.

''While this is a very positive and sensible step towards a more normal set of policy conditions, it may cause volatility as it occurs,'' he said.

The World Bank this week raised its forecast for global growth for the first time in three years as advanced economies started to pick up pace, led by the United States.

The rosier outlook suggests the world economy is finally breaking free from a long and sluggish recovery after the global financial crisis.

The poverty-fighting institution predicted global gross domestic product (GDP) would expand 3.2% this year, from 2.4% in 2013, according to its twice-yearly ''Global Economic Prospects''. In the bank's last forecast in June, it expected global growth to reach 3% in 2014.

The bank said the global economy had reached a ''turning point,'' as fiscal austerity and policy uncertainty no longer weighed as heavily on most richer economies. The bank expected stronger growth in the United States in particular, of 2.8% in 2014, from 1.8% last year.

''For the first time in five years, there are indications that a self-sustaining recovery has begun among high-income countries, suggesting that they may now join developing countries as a second engine of growth in the global economy,'' the bank's chief economist, Kaushik Basu, said in the report.

Mr Easton said New Zealand faced the prospect of rising interest rates and a general election later this year.

The former would slow house price growth and increase borrowing costs and the latter would lead to some uncertainty, particularly given how close the polls suggested the result would be.

On balance, there were more positives than negatives, although with many of the major equity markets having produced ''outstanding returns'' of between 20% and 30% last year, the pace of gains was expected to slow this year, he said.

The outlook for the New Zealand dollar remained tied to the actions of the Fed in coming months. If the Fed continued to reduce stimulus steadily this year, as Mr Easton believed it would, the New Zealand dollar should gradually decline against the US dollar.

''Against the Australian dollar, we expect recent strength to continue over the short-term, although we may have seen the most dramatic of those moves already.''

The official cash rate would almost certainly increase in the first half of the year, and the first move was likely to be in March, Mr Easton said.

The consensus view was for increases of between 0.75% and 1%, which would put the cash rate at between 3.25% and 3.5% by the end of next year, compared to the current 2.5%.

The only potential threat to whether the central bank would go ahead with those forecast rate hikes appeared to be the ''stubbornly strong'' kiwi. If the Fed announced further tapering in either January or March, that should not be an issue, he said.

Listed property offered a solid income outlook with dividends at sustainable levels and an average gross yield of more than 8%. That should keep the sector well supported, although interest rate rises could see yield investors placing less relative value in high-yielding entities.

As the economy gained further momentum, there might be some increases in property values and the prospect of some much-needed rental growth might emerge, Mr Easton said.

''We have a positive view on equities over the coming years. The local economy is gaining momentum and 2014 is expected to be a strong year in terms of growth. Our corporate sector is in good shape with low debt levels. Forecast earnings growth are close to 10% for the next 12 months, with an average gross dividend yield of nearly 6%. These factors should all keep our market well supported.''

Craigs remained positive on global equities, including Australia, at current levels and saw potential for some of those offshore markets to perform better than New Zealand, he said.

The high dollar also provided an opportunity to add to offshore holdings, particularly as there could be some weakness creep into the New Zealand currency as the Fed continued its tapering process.

- dene.mackenzie@odt.co.nz

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