Quarterly economic update: April – June 2024
The economy continues to slow, with inflation remaining sticky, the new federal budget making waves, and global events that may have a significant impact. Despite investment returns for the financial year were very strong.
Financial year 2023/24
2023-24 provided another year of strong returns for investors as shares were boosted by falling inflation, central banks pivoting towards rate cuts (although is RBA is lagging) and economic conditions were better than feared. Global shares, in particular tech stocks, delivered strong returns, as did the Australian listed property sector. When combined with typical defensive cash & bond returns, most balanced portfolios returned around 9-10% for the year depending on tax treatment.
Uncertainty at home and abroad
The current outlook indicates uncertainty both domestically and internationally, making it unlikely that inflation will reach the target range of 2-3 per cent in the near future.
May forecasts suggested that inflation would return to the target range by the second half of 2025 and reach the midpoint by 2026. However, recent indicators point to weak economic activity, such as slow GDP growth, an increase in the unemployment rate, sluggish wage growth, and uncertain consumption growth.
Advanced economies are experiencing a slowdown in growth, although there are signs of improvement in the Chinese and US economies, along with increased commodity prices. Nevertheless, geopolitical uncertainties remain high, which could potentially disrupt supply chains.
Interest rates remain steady, but the pain may not be over
The Reserve Bank of Australia (RBA) kept interest rates on hold and the cash rate steady at 4.35 per cent throughout the quarter.
At the June RBA board meeting, Governor Michele Bullock stated that the board has not dismissed the possibility of further rate hikes. Interest rates will stay at this level until the RBA's next board meeting in early August.
Inflation persists, despite slowing
Inflation remains persistent, with the RBA predicting that it will take some time to consistently stay within the target range of 2-3 per cent.
Although inflation has decreased significantly since its peak in 2022, the rate of decline has slowed. At the same time, economic growth has been limited as households cut back on non-essential spending due to income constraints.
What are we spending on?
Households are continuing to limit their spending on non-essential items. Spending on discretionary goods has shown a slow increase, rising by only 0.6 per cent over the year. On the other hand, spending on non-discretionary goods and services has risen by 5.8 per cent, mainly due to higher fuel and food costs. Household spending on health has significantly increased, showing a 15.7 per cent rise compared to this time last year. Health spending made the largest contribution to the overall 3.4 per cent rise in household spending in April.
China lifts Aussie beef bans
China has lifted bans on most beef and other exports. The bans began in 2020 when China suspended beef exports from eight processors and imposed official and unofficial trade barriers on barley, coal, lobster, wood, and wine, costing exporters $20 billion Australian dollars ($13 billion) a year. With the lifting of these bans, less than $1 billion worth of Australian exports are still being impeded. This marks a significant reduction from the previous $13 billion impact on Australian exporters.
Trump down but not out
Donald Trump's conviction on 34 felony counts of falsifying business records has not stopped his campaign for President. As the November election looms closer, economists have expressed concerns about Trump's campaign promise to impose a 10 per cent tariff on all US imports.
If implemented, this and other trade policies could trigger another round of trade wars, disrupt international trade, and impact global growth.
The outlook and implications for investors
Recent strong returns suggest future returns could face headwinds, and risks such as persistent inflation, continued conflict in Ukraine and the Middle East, the risk of recession in Australia, and political uncertainty in the US all pose problems for growth markets.
At the same time, central banks do have a decent record of eventually reigning in inflation through monetary policy, and this eventually leads to interest rate reductions and a return of confidence.So expecting volatility, as always we advocate a reasonable degree of diversification, with wealth accumulators taking advantage of buying opportunities as they arise, and retirees ensuring they are positioned to be patient with the growth portion of their portfolios.
| Asset Class summary – 30 Jun 2024 | 1 year % total return |
|---|---|
| Australian Shares | 11.9 |
| Global Shares (hedged) | 19.4 |
| Global Shares (unhedged) | 19.0 |
| Australian Property Securities | 23.8 |
| Australian Bonds | 3.7 |
| Global Bonds (hedged) | 2.7 |
| Cash | 4.4 |