December Economic update

By Craig Turnbull, Active Super Chief Investment Officer
December 2021

Over the past 12 months, Active Super has recorded* some of the strongest returns in our 24-year history, driven by record low interest rates and massive government stimulus payments.

Despite the pandemic, the S&P/ASX 200 hit a record high of 7632 points in what was a stellar year for super balances and member returns. Over the course of 2021 up to mid-December, the Australian sharemarket has risen around 12 percent and in the US the S&P 500 has gained 25 percent.

Company profits were also strong with bumper dividends also boosting super accounts. Australian companies reported very strong earnings growth of more than 26 percent for the 2021 financial year and paid out a record total of $67 billion in dividends. Stronger earnings growth is the primary driver of share prices and in this calendar it is tipped to be even higher in the US and globally.

Rates on hold

Another key driver of markets over the year has been the accommodative monetary policy set by global central banks, including the Reserve Bank of Australia which has kept interest rates at a record low of 0.1 percent despite growing concerns about emerging inflation and rising bond yields.

At its final policy meeting for 2021, the RBA left the cash rate unchanged and reiterated its weekly $4 billion bond-buying program schedule until at least mid-February 2022.

The central bank also vowed to keep interest rates steady until inflation sits within the range of 2 to 3 percent as inflationary pressures in Australian remain weaker than in many other countries. 

With the RBA forecasting moderate levels of inflation over the next two years, real wage growth is likely to remain low. The RBA forecasts that underlying inflation will hit 2.5 percent in 2023, from 2.1 percent currently. Until that happens, the bank won’t entertain lifting interest rates.

“This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the board is prepared to be patient,” RBA Governor Philip Lowe said.

Economic growth

In terms of the overall economy, Australian gross domestic product (GDP) contracted just 1.9 percent in the third quarter despite both NSW and Victoria being in lockdown because of the spread of the Delta variant. This was better than the expected contraction of 2.7 percent. 

The NSW economy took the biggest hit over the quarter as Sydney spent the entire period in lockdown. In NSW, there was an almost 11 percent decrease in household consumption. The hospitality and construction sectors were particularly affected.

The Bureau of Statistics highlighted strong company profits, driven by record iron ore prices in the first six months of the year, prompting strong dividend flows that helped strengthen super and bank accounts.

As we head into 2022, the market is expecting December quarter GDP to have bounced back with the outlook for the year ahead to be quite optimistic.

The RBA expects the economy to grow 5.5 percent in 2022.