Quarterly economic update: July – September 2022

Introduction & global events

As geo-political tensions tighten in the Ukraine, economies around the world are reeling from mounting energy prices, soaring costs of living and in a desperate attempt to bring down inflation, higher interest rates.

The US economy appears certain to fall into recession, causing investors everywhere to take fright. Markets have suddenly become volatile as shares are sold in favour of holding funds in defensive assets such as cash.

This in turn is having an effect on world currency markets. Funds are flooding into US dollar denominated investments and in doing so, are sending the value of the greenback up against other currencies.

Speculation is mounting that the British pound may fall to historic lows in coming months and may even reach parity with the US dollar, driven by the newly elected Prime Minister Liz Truss, implementing a big borrowing, low taxing budget.

This controversial attempt to boost the British economy comes at a time when central banks around the world, including the Bank of England, are lifting interest rates in order to reduce economic activity and so, dramatically slow the rate of inflation.

The Organisation of Economic Co-operation and Development (OECD) is now forecasting economic growth will slow from 2.8 to 2.2 per cent during the next twelve months as the United States, China and Europe all cut back on economic activity.

Meanwhile here in Australia…
While Australia is not spared from this global slowdown, with the OECD forecasting domestic growth will tumble from 2.5 to 2 per cent during the coming year, we should survive this turbulent period better than most.

Strong prices for local exports of basic minerals and agricultural products are expected to remain as long as the war in Ukraine continues cutting energy supplies to Europe and causing price hikes in everything from oil to fertilizers.

Much will depend on October’s Federal Budget. The first by the newly elected Albanese Government, it will tread a line between its reform agenda including much talk about tax cuts and trying to slow the economy and so reduce inflation.

Although the employment rate across the nation remains high, spiralling prices for basic foodstuffs and other essentials is putting enormous pressure on the Government to provide relief to those struggling to get by.

In the meantime, petrol prices are set to bounce higher as the Federal Government restores the fuel excise tax, adding 23 cents a litre to both petrol and diesel sold in Australia.

Interest Rates & property
The Reserve Bank has made it clear it will continue to lift the domestic cash rate and with it most other local interest rates, until it has clawed back the rate of inflation from an expected high of 7 per cent, to less than 3 per cent.

Higher interest rates are already impacting homebuyers. Five rate rises since May, mean a couple earning $92,000 each, can now borrow $264,000 less than they could in April according to analysis by the research house, Canstar.

So even with a 20 per cent deposit, a couple’s maximum budget has dropped from more than $1.63 million to $1.37 million and this in turn is being reflected by prices in the property market. As buyer’s budgets have fallen, so too have property prices. CoreLogic Home Value Index shows house prices in Sydney have dropped by 7.6 per cent this year while Melbourne prices have fallen by 4.6 per cent.

With the Reserve Bank determined to force even higher interest rates on the economy in order to defeat inflation, there is no end in sight to higher interest rates and potentially further property price falls.

The outlook and implications for investors

While periods of volatility and ongoing market decline can be alarming, it’s important to remember some of the investment lessons of the past.

Firstly, “it’s time in the market, not timing the market”. We know that investment markets are forward-looking, they move quickly, and are unpredictable. When some good news eventually comes, as it always does, you need to be invested in order to benefit from the turnaround. This means sticking to your strategy through the good and the bad. If you’re concerned about your investments, speak to your adviser about how your portfolio and strategy are built to allow patience, and capitalise on the eventual recovery.

Another great saying is “the share market is a mechanism for the transfer of wealth from the impatient to the patient”. When tough times come along, those who sell at a low point are crystallising losses, and those who buy are the beneficiaries. Volatile markets are the time to buy cheaply if you can, or else continue to hold and wait for the recovery.

Finally, remember that tough times don’t last forever, and there are many factors supporting the case for growth assets- we have high employment levels, predicted global growth (albeit lower than previous estimates) and central banks around the world conscious of not overdoing it with rate increases.

Economic indicators – 30 Sep 2022  1 year % excluding dividends
Australia: ASX 200 -11.7
Japan: Nikkei 225 -11.9
China: CSI 300 -21.8
UK: FTSE 100 -2.7
US: S&P 500 -16.8
Australia: Current at 30 Sep 2022
$AUS: $US 0.64
Official interest rates (%) 2.60
10-year bond yield (%) 3.89

Published : 10 Oct 2022

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