What you need to know about the year that was

The financial infection that spread across the world in 2008 and 2009 was treated with antibiotics – that is, easy money from the world’s central banks and government austerity programmes.

For the most part, the drugs distributed eased the pain of the underlying disease, but the disease has not been cured.

In addition, the world’s leaders have been scrambling for as much of the global economic pie as they can get.

Why?

Well, for their own purposes of course, and to reap the benefits of as higher a living standard as they can achieve for their countries.

As with all periods of great change and uncertainty though, revolutions – both in terms of geopolitics and at the consumer level – have pushed the world forward.

Here’s how it all played out.

The United States still controls the world

For years the US Federal Reserve said that it would start to tighten monetary policy once the unemployment rate fell below 6.5 per cent.

That figure came and went. The central bank justified its inaction by saying that it wanted to see more evidence of sustainable economic growth.

Part of the reason for that is due to the ‘inaccuracies’ of the employment statistics (over 40 million Americans remain on food stamps so they’re out of the unemployment statistics and that’s reduced the credibility of the official employment numbers).

Related: How Obamacare will affect US economy

So while the unemployment rate may be ‘low’, it doesn’t represent what’s actually going on in the US economy. What we’re actually seeing is an economy that’s struggling to gain real traction.

The world will know the US is on the right path, economically speaking, when the US Federal Reserve can raise the Fed Funds Rate and have both Wall Street and the credit markets able to stand upright on their own.

China

In terms of world economic impact, after the United States comes China. No one denies that the pace of economic growth in the world’s second largest economy is slowing. The question is: how much further will it slow down?

American economist, Nouriel Roubini, argues that China’s economy will slow to around 6.5 per cent to 7 per cent by the end of 2014.

Put simply, the great economic transition that China is engineering (moving away from export-led growth to middle class consumption) is taking time and the economy is slowing in the process.

Related: China to be world's biggest economy by 2014, strictly in dollar terms

The economic powerhouse is also dealing with an inflated property market, local government debt, and social unrest as farmers are forced off their land and sent into the cities without any social security. This is all taking a toll on the economy.

The bottom line for Australia though is that if China continues to slow to between 6 per cent and 6.5 per cent, Australia will likely flirt with some sort of broad-based economic contraction.

Geopolitical concerns

So what about the rest of the world? Is everyone getting along?

My late father was an officer in the Navy for many decades. He used to talk about strategic “flashpoints”. There are currently several flashpoints around the world. They include Iraq, Syria, Ukraine, and North Korea. And yes, it’s all influencing global finance.

At a very basic level markets detest conflict and political uncertainty. On a month-to-month basis the tension and violence between Ukraine and Russia has caused both countries’ currencies to drop to record lows against the US dollar.

The conflict did reach a crisis point back in January, so it’s no surprise that that’s when both currencies started to hit the skids.

NATO has also warned the conflict could escalate further, and if it does, Russia (which is already feeling the effects of Western Sanctions) could be hurt even more by another round of economic pain inflicted by the US and Western Europe.

The progress of the Islamic State of Syria and Iraq has unsettled markets as well.

It has distracted politicians and directed money back towards the Middle East at a time when the US would prefer to focus on its domestic agenda.

It must also be said that the sheer horror of what the militia movement has done (and is doing) to civilians is depressing the hearts and minds of many people around the world. I hesitate to use this as an example of what has influenced markets, but the reality is that is has destabilised an important economic region.

An awkward dinner party

The world won’t be falling apart tomorrow though. In fact the APEC Summit in November 2014 saw the world’s leaders come together.

Despite their best intentions, predictably, there were several awkward moments between leaders. One exchange involved China’s Xi Jinping and Japan’s Shinzo Abe. Another frosty encounter was between Australia’s Tony Abbott and Russia’s Vladimir Putin. [Watch video below]

Sovereign states naturally have different agendas.

Currently though the economic difficulties around the world are turning what are normally difficult relationships into downright awkward ones.

For example, China, on the one hand, is seeking to expand its economic power around the world, and is also looking to work on its relatively cordial relations with Russia.

The US, on the other hand, is having difficulty with Russian politics (on a number of fronts) but wants to work better with China on the economic front. China too has quite a complicated relationship with Japan.

Then there’s Australia’s relationship with Russia.

Prime Minister Tony Abbott says he simply wants justice following the tragic downing of MH17 but Russia isn’t co-operating.

In terms of business deals, what we know is that the Summit saw 12 countries work on the Trans Pacific Partnership (TPP).

Related: Australia, China to ink $18 billion deal

This partnership is cynically viewed as the US’s attempt at securing economic security in the Asia-Pacific region outside of the watchful eyes of both China and Russia.

The Free Trade Area of Asia Pacific (FTAAP), on the other hand, is China’s domain. Not much was achieved this year but that’s not unusual given how many conflicting demands exist between countries.

What we can say though is that Australia and China moved towards freer trade relations (with the usual concerns about how much economic power/control China will have in Australia), and the US and China made progress towards reducing carbon emissions.

Watch: Awkward moments at APEC

How have the markets fared? ... the sensitive little things that they are

Just a small piece of advice: generally speaking markets don’t crash when the media’s speculating that they will.

Markets usually crash when most traders aren’t expecting them to – during a period of euphoria, or a period of collective delusion when investors believe they can only rise. What market speculation can create, however, is volatility.

We’ve certainly seen that in Australia.

S&P ASX 200 over the last year

Australia has flipped-flopped over a broad trading range of between 5,000 and 5,600. Since the end of last year it’s essentially edged up around 200 points with a heck of a lot of volatility in between.

The US, on the other hand, has performed remarkably well – largely thanks to easy money and corporate earnings stability.

The Dow Jones Industrial Average is up 6 per cent for the year as I write this.

The S&P 500 is up a handsome 10 per cent.

In terms of the key commodities: oil and gold – both have followed similar paths in 2014. Aside from the obvious weakening in demand, I suspect it’s the recent rise of the US dollar that has taken the zeal out of these two commodities (both are priced in US dollars).

Fears of correction

So I guess the question that everyone has been asking for some time now is, will the markets correct or even crash in the short term (especially the equity market)?

As I’ve argued in previous columns, I don’t see the ingredients in the Australian equity market for a crash. The market is, however, screaming out for stronger broad-based economic growth. (Read David's column: A trust of Australia's mettle: Just how strong are we?)

As far as the US equities market is concerned, it will almost certainly correct/crash if the Federal Reserve is, for some reason, forced into raising interest rates without warning or in a hurry.

Companies

Apple CEO Tim Cook

It’s all very well talking about the market as a whole, but the indices are of course made up by individual companies. So what trends emerged in 2014?

As expected, earnings growth in the Australian market averaged around 3-5 per cent – largely driven by cost-cutting. Dividends were also used again (especially by the banks) to attract investors.

In the UK, British Banks came closer to returning to profitability while fighting tooth and nail for bonus payouts. A very thrifty consumer is also forcing a big shake-up in the supermarket sector.

In the US, it was all about keeping up appearances. This was captured by one of the most anticipated product launches of the year.

Apple unveiled its iPhone 6 and iPhone 6 Plus, as well as the iOS 8.

Photos: Apple's next big things

And as a little teaser, the tech giant gave us a glimpse of the Apple Watch – due out in February next year. Speaking of coming out, we also learnt that Apple’s CEO, Tim Cook, is gay..

The fact that he is gay is largely irrelevant, but that he chose to use Apple’s brand as a platform to come out means the tech company is now swimming in the political sphere as well.

New Money

From well-established companies to new listings, we discovered that significant amounts of ‘hot money’ remain in the market.

In fact if there was any doubt that new money was ready to come in off the sidelines following the Facebook float, full confidence returned when Chinese e-commerce company Alibaba hit the open market in New York in September.

It raised $25 billion, making it the largest technology listing in US history. Its momentum was consolidated on Singles Day in China (the largest online shopping day in the world) when it generated $9.3 billion in the space of 24 hours.

Retail Revolution

Any re-cap of the year has to save room for a report on the progress made in the online revolution. The music streaming website, Spotify, has become the single-biggest driver of revenue in the music industry with 50 million users.

Netflix too continues to push forward in the on-demand video and television space. As of September the company had subscribers in over 40 countries. Australia, however, is not one of those countries… yet.

Australia

So how did Australia fare this year?

Fiscally, the Federal Budget remains stuck in a structural deficit. Earlier this year government debt ran at a little over $300 billion.

Now it’s more like $3.26 billion.

The nation though has held onto its Triple-A credit rating with a debt-to-GDP ratio of around 27 per cent to 30 per cent (a relatively low ratio compared to both the US and the UK).

A saw point for both the budget and the economy this year has been the fall in the price of iron ore – Australia’s key export commodity.

Falling demand from China has been the primary driver of this phenomenon.

The Reserve Bank has kept the official cash rate at a record low of just 2.5 per cent to cushion the economy’s jump from economic growth driven by the mining sector, to more broad-based economic activity led – it’s hoped – by the construction and retail sectors.

There’s been mixed results in implementing this transition. As a result, and despite Australia’s relatively high interest rates (from a global perspective), the Australian dollar’s finally come under some sustained pressure.

The Aussie dollar will likely fall further as the US dollar rises (as the Fed tightens policy) and China continues to slow.

One aspect of the economy that’s both confused and frustrated policymakers is the rise and rise of the Australian property market.

The Reserve Bank could limit the market’s progress by raising interest rates, but given the slack already in the economy, tighter monetary conditions could stifle what little activity remains in the economy.

It’ll come as no surprise to you then that the latest business survey out of Australia revealed that there are still more pessimists than optimists out there. Businesses simply aren’t terribly confident about what’s around the corner.

Keep your eye on the Australian unemployment rate – assuming it’s accurately measured of course. For my mind that’ll be a key figure in 2015.

I know it’s a backward-looking statistic but it’ll be a bit of tester for both the property market and, to a lesser extent, the currency market.

If employment growth slows significantly, house prices will come under pressure and the dollar will lose more of its appeal.

Australia will then face some policy challenges that have been put off for quite some years now.