The three bears stalking the Goldilocks economy

20 December 2017

Wage growth and inflation are risks that could lead to a bearish turn in the new year, explains Mark Rider.


We can best describe 2017 as the year when the global economy found a well-balanced groove to run in, and prosper.

Throughout the year, levels of growth across global markets came into sync above-trend without provoking inflation, which in turn caused interest rates to stay low – creating a reinforcing cycle of economic growth and causing sharemarkets to steam ahead.

Despite a wide range of commentary from experts, fears the market had reached its zenith, and potential for considerable political disruption – nothing stopped growth, or even seriously challenged it in 2017.

So the question for investors now is will this well-balanced situation maintain its equilibrium, or will the ‘Goldilocks’ economy be spooked by an unexpected change?

And it’s looking just a little more likely that could happen.

As we have noted in recent House Views, we envisage 2018 to be more of the same in terms of economic growth, but as we get closer to the new year, some of the key indicators we have been monitoring are no longer in the green zone.

Wage growth and growth in the cost of goods and services are the key economic challenges for the new year.

The low interest rates that have been in place for so long must soon affect prices and lead to an inflation scare. And that development would be a big challenge to our easy financial environment.

It’s the opinion of ANZ’s chief investment office that investors are underestimating this threat. Lulled into over-confidence by current financial conditions, they’re keeping the values of a wide range of investment assets quiet high, as though these risks are distant.

As a result we expect ‘three bears’ to emerge more distinctly through 2018 and challenge our Goldilocks economy, and investor confidence:

  1. the US moving into the boom phase of its economic cycle, with heightened inflation risk and more rate hikes from its central bank

  2. China continuing to steadily tighten financial conditions as it tries to manage debt and danger areas in its economy

  3. central banks, which have been buying bonds to stimulate economies ever since the global financial crisis, are set to de-escalate that activity and reduced the hefty balance sheets they have accrued (weaning economies off this artificial support and making them stand on their own could definitely cause growth to dip and hurt confidence).

Right now, global growth is looking more normal, indicating, hopefully, that the global economy is finding its place, a decade after the financial crisis. And as we’ve said before, we do expect equities and other growth assets to perform well in 2018.

But investors must note that already, while wages and inflation are currently subdued, a number of lead indicators suggest the pace of wages and inflation could pick up faster than currently expected by markets through 2018. And the repercussions of that could be quite serious.

Investment positions at December 2017

Asset class Position relative to benchmark/outlook1
Growth assets Neutral
Australian equities Neutral
International equities Neutral
  - United States Neutral
  - Europe Neutral
  - Japan Neutral
  - emerging markets Neutral
Listed real assets2 Neutral
Defensive assets Neutral
Fixed income Underweight
  - Australian Neutral
  - New Zealand Neutral
  - International Underweight
Cash3 Overweight
AUD/USD Neutral
NZD/USD Neutral
USD TWI Neutral

1. Equities, fixed income and cash are relative to benchmark. Currencies are relative to an absolute return outlook (short term).
2. Comprises of 50/50 split between GREITs and infrastructure securities.
3. Cash is the balancing asset class.
Investment positions as at December 5, 2017.

To read the full Chief Investment Office House View, click here.