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Quarterly Economic Update: Jul – Sep 2023

11 October, 20238 November, 2023 Updated on8 November, 2023 Economy, Finance, Investing

Australia’s annual inflation rate has taken an unexpected step up, increasing pressure on the Reserve Bank to push interest rates higher and once again raising the prospect that Australia will fall into recession sometime over the next few months. The annual inflation rate for the year to August reached 5.2 per cent, up from 4.9 per cent recorded for the year to July, spurred by higher prices for petrol, financial services, and labour costs, following the 5.75 per cent wage rise for 2.4 million Australian workers in July. Some analysts believe recent wage increases and the Federal Government’s drive to reduce unemployment levels below their current historic low levels and provide more union friendly workplace regulations, will combine to push wages even higher. The prospect of further wage hikes, low productive improvements combined with continued high levels of inflation, threatens to return the Australian economy to the dismal economic days of the seventies and with it, stagflation. Of all the domestic price hikes though, higher petrol prices are seen as the most troubling as they have such significant flow through effects, making everything in the country more expensive to produce and so lifting the cost of living for all Australians. The prospect of higher oil prices internationally, following a decision by Russia and Saudi Arabia to restrict production to boost prices, has cast gloom across the global economy, putting economies everywhere under pressure of higher energy costs. Globally, US Treasury 10-year bond yields rose to above 4.5 per cent during the past month, taking them to their highest level since the global crisis started in 2007, as fears mount that climbing inflation will persist for years to come. This, and the generally accept downturn in growth in the massive Chinese economy, is prompting fears overseas that the US economy will certainly fall into recession next year, with developed countries around the world certain to follow. While there was hope the Reserve Bank was succeeding in driving down inflation, this latest uptick in prices and overseas interest rates, will put the Reserve Bank under renewed pressure to lift domestic rates yet again. Although the much talked about fixed-rate mortgage cliff seems to have been averted, where homeowners have faced the end of super low fixed rate loans and been forced to move to higher variable rate loans, pressure is emerging in the housing market. According to figures from the research house, Core Logic, the number of homes that have been sold at a nominal loss, and which have only been owned for two years or less, has increased from just 2.7% to 9.7% during the June quarter. Pressure is building most clearly in the sale of home units with 14.4 per cent of all unit sales across Australia selling at a loss during the June quarter, compared to just 3.8 per cent of all homes sold during the same time. There also seems to be a trend where people who moved to the regions during the pandemic are starting to sell up and drift back to the cities.  Resales within two years of purchase, made up 11.1% of all regional resales, compared to a decade average of 7.2% per year. A rare bright spot for investors remains the hefty returns to shareholders with Australia’s largest listed companies paying out some $21.7 billion during the last week in September, by way of improved dividend payments. BHP paid out $6.34 billion to their shareholders via a $1.25 per share dividend, Fortesque Metal paid out $3 billion via a $1 a share dividend and after posting a record-breaking profit, the Commonwealth Bank of Australia paid out $4 billion by way of a $2.40 a share dividend. The information provided in this article is general in nature only and does not constitute personal financial advice. 

Quarterly Economic Update: January-March 2022

27 April, 202220 April, 2022 Updated on20 April, 2022 COVID-19, Economy, Investing

Robust domestic economic growth Australia is rebounding from the pandemic, with domestic economic growth forecast to reach 3.5 per cent this financial year. Some analysts predict it might be even stronger, possibly reaching as high as 4 per cent. Driven by Government spending Much of this is due to the lingering impact of the Federal Government’s massive $343 billion health and economic pandemic support packages, as well as further spending in response to recent floods in New South Wales and Queensland. The Government is also spending some $18 billion on infrastructure, mostly rail and road improvements, in an attempt to boost productivity and efficiencies throughout the economy, particularly in the regions. Tightening geo-political tensions in Asia and around the world has prompted the Government to earmark as much spending again on strategic defence measures, including a new naval submarine base on the east coast. Spurred by higher commodity prices The sudden, and largely unexpected, war in Ukraine has prompted a spike in oil prices as a shadow falls over the continued supply of Russian oil and gas to Western Europe. While prices will ease with the arrival of the Northern summer, they are expected to remain stubbornly high. The war, along with continued supply interruptions due to the pandemic’s lingering impact on world trade, means prices for key commodities such as iron ore, coal, and wheat will remain high for the foreseeable future. For Australia, this is, on balance, good news, meaning the price we are paid for key exports will remain strong, driving both domestic profits and Government tax revenue higher. Employment is exploding In line with this strong level of economic growth, domestic unemployment is set to fall to 3.75 per cent in the coming months, its lowest level in some 50 years. Meanwhile, whole sectors, such as the aged care and child-minding sectors and a number of agricultural sectors, are reporting desperate staff shortages, prompting calls to lift migration levels and allow more temporary workers into the country. Nonetheless, low wage growth continues to dog the economy. While the Government is forecasting quarterly wage growth of 3.25 per cent by the middle of next year, this is still below the expected inflation rate, meaning most Australians will face little relief from higher living costs. However, the continued strength of Government spending, combined with prevailing strong terms of trade, should boost profits across the board, leading to higher returns for investors. Despite some clouds on the horizon As always, there are clouds on the horizon. The United States was already facing inflationary pressures, and the impact of the Ukraine war on oil prices is likely to push the US inflation rate higher still, possibly touching 7.9 per cent this year. The US Federal Reserve has started to pull monetary policy back in with a series of interest rate hikes, fanning fears that the US economy may fall into recession later this year. The US is not alone. The Australian Federal Treasury expects global trade bottlenecks (the war in Ukraine and higher oil and food prices) to prompt an uptick in the local inflation rate above the Reserve Bank’s preferred inflation band of 2.5 to 3 per cent. Rising inflation is, in turn, spurring fears of a domestic interest rate hike, with many analysts expecting the cash rate to increase by one full percentage point, which could cause home loan rates to rise across the country. The information provided in this article is general in nature only and does not constitute personal financial advice.

Quarterly Economic Update: October-December 2021

19 January, 202220 April, 2022 Updated on20 April, 2022 COVID-19, Economy, Investing

Coronavirus Victoria and New South Wales saw their economies roar back to life as they emerged from lockdown just in time for a new kid to arrive on the coronavirus block. Omicron spread around the world seemingly within days knocking Delta off the front pages. Appearing to cause less severe disease than previous strains, and with Australia achieving high rates of immunisation, state governments held off resorting to lockdowns in an attempt to minimise financial carnage on businesses and workers. All this battling against the virus comes at an enormous cost. The mid-year budget update forecasts annual deficits of around $100 billion for the next few years, no surplus over the next ten years, and gross debt of $1.2 trillion by 2024-2025. Jobs galore The unemployment rate dipped to 4.6% in November as an additional 366,100 people joined the ranks of the employed. The under-employment rate fell 2% to 7.5%, and many employers reported difficulties in finding staff. Homebuyer hopes Homebuyers gained a little power over sellers towards the end of the year as a surge in listings saw auction clearance rates in Melbourne and Sydney drop to 66% and 73% respectively. If this extra supply is maintained it should help to cool what has been a very hot property market. COP this The Covid-delayed climate change conference COP26 was finally held in Glasgow, and Australia joined the large number of countries aiming to reach net zero carbon emissions by 2050. Good progress was made in some areas, such as reducing methane emissions, ending deforestation and, for some countries, phasing down coal. However, modelling predicts that if all current commitments are fulfilled we will still see temperatures rise by 2.4 degrees. This is well short of the Paris Agreement goal to limit warming to 2 degrees, and preferably 1.5 degrees. The Glasgow Climate pact calls on nations to “strengthen their pledges to reduce emissions by the end of 2022.” Expensive energy Major energy users suffered from a big spike in the costs of both coal and natural gas during the quarter. Prices corrected abruptly in November, but still remained much higher than at the start of the year. Oil prices were also higher, nudging US$85 per barrel during October and November. Aside from hitting consumers’ petrol and home energy bills, high energy prices also led to an increase in the cost of, and shortages of urea – a chemical that is critical to the production of fertilizer (and therefore food) and to keeping diesel trucks on the road. Ups and downs The volatility in the value of the Aussie dollar against major currencies continued for the quarter. It traded between 70 US cents and 75 US cents in line with its long-term trend. We gained more than 3.7% against the Euro and Yen, and held ground against the British Pound. The local share market failed to excite, tracking sideways before putting on a small end of year spurt that saw the S&P ASX 200 close the quarter up 1.5%. It was a different story for US stocks. The S&P500 closed out the year at a record high after lifting nearly 11% for the quarter. The Nasdaq was close behind with a 9% gain. The information provided in this article is general in nature only and does not constitute personal financial advice.

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