Progress will likely be slow, however, as falling commodity prices remain a significant headwind to national income in the near term. This could see unemployment rise further, limiting any improvement in consumer confidence. ANZ believes an even lower $A is needed to support this transition.
Meanwhile, the lack of progress on unemployment and contained inflation should see the Reserve Bank of Australia maintain the cash rate at its current low level throughout most, if not all, of 2015.
Economic growth in New Zealand has been above trend in recent years. Despite this, there has been little to show in the form of inflationary pressures. The only exception has been the Auckland housing market.
ANZ expects domestic NZ growth to ease but remain robust over the next 12 months, in part due to a growth boost from the Christchurch rebuild coming to an end. Weaker terms of trade, in particular declines in dairy prices, are also expected to contribute.
Our expectation is slower growth and the continued absence of inflationary pressures will see the RBNZ keep interest rates unchanged in 2015.
THE ASIAN REGION
The uneven recovery in exports is likely to continue throughout Asia in 2015. While a pickup in consumer spending and business investment in the US should boost demand for Asian exports, subdued growth in Europe and China respectively is expected to offset some of the benefits.
Lower commodity prices offer a bright spot for Asia. As most Asian economies are large net oil and commodity importers, a sustained period of low prices can potentially improve trade and current account balances.
Lower oil prices can also mean smaller energy subsidies for governments and higher disposable income for consumers. In particular, India is expected to be a beneficiary of these favourable dynamics, and its star may shine brighter as the prospects for serious reforms improve in 2015.
Finally, contained price pressures also open the door for rate cuts. While the policy stance in the region would probably need to remain restrictive to act as a shock absorber to rising US rates, the painful cycle of rises has probably run its course.
China’s economy suffered from growing pains in 2014 as the long transition towards a consumer-driven growth model continued. This new economic framework is expected to see China continue to shift from a high-growth to a lower-growth trajectory.
In addition, China’s desire to slow credit expansion and shadow banking is likely to continue to weigh on the economy in 2015. The country’s weak property market would also be a drag to the economy; to date it has yet to respond convincingly to greater government mortgage support and relaxation of ownership restrictions. Some relaxation of the transaction tax on the housing market also appears likely.
Not surprisingly, the risk of deflation is rising against this lacklustre growth backdrop. While the government has preferred to use more targeted easing measures in 2014, ANZ cannot rule out the possibility of broader based pro-growth measures such as a further cut in interest rates or the reserve requirement ratio especially if growth starts to slow sharply in 2015. The capacity for policy makers to respond with more widespread stimulus means the risks of a sharper downturn remains low in 2015.
Over the long term, new growth drivers such as the development of innovative and high-end equipment industries as well as the ongoing urbanisation program should help China achieve higher quality and more sustainable growth. But growth pains cannot be avoided in the near term.
The year started strongly in Japan as the Bank of Japan (BoJ) was successful in driving the yen lower. However, an increase in the value added tax (VAT) rate in April drove the economy back into a technical recession. This highlighted the dichotomy between a fragile consumer and a strengthening producer sector.
ANZ expects growth in 2015 to be supported by lower oil prices and the BoJ’s strong commitment to do whatever necessary to drive the economy out of deflation. The continued expansion of its balance sheet is likely to push the yen lower. The announcement of a delay in the next tax rise and potential for further short-term government stimulus are also positive for the growth outlook.
However, if there is any lesson to be learned from the past two years, it is sustainable inflation in Japan can't be achieved via a lower currency. Indeed a lift in inflation without a pickup in wages simply hurts households' purchasing powers, and with it growth.
More needs to be done on the structural reform front to boost labour supply and wages in order to be confident on Japan’s long-term prospects. The government will need to progress this reform agenda in 2015.
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Stewart Brentnall is Chief Investment Officer, ANZ Global Wealth.