SEPTEMBER ECONOMIC UPDATE

By Craig Turnbull, Active Super Chief Investment Officer
September 2021

Australian shareholders benefited from a robust corporate earnings season with companies delivering better-than-expected profits and bumper dividend payments.

The strong results to June 30 were locked in prior to the current COVID-19 outbreak and come as the market begins to factor in an economic slowdown in the current September quarter.

Investors will start receiving dividend payments in the coming weeks in what has been billed as one of the richest earnings seasons in Australian corporate history. 

Super benefits

Superannuation funds will also benefit from this windfall as dividends flowing in will boost the size of investment holdings.

The stock market remains attractive as it is delivering yields of around 3 percent. This compares favourably to bank deposits as official interest rates are at 0.1 percent, essentially generating negative real returns once inflation is considered.

With investment dollars continuing to flow into equities, superannuation funds stand to gain as investors seek out stocks to provide them with a yield and solid long-term returns, driving up share prices and boosting superannuation balances at the same time.

Of course, past performance is not a reliable indicator of future performance and the market isn’t expecting this to be repeated in the fiscal year ahead.

Weathering the storm

While strong profits and record dividend payouts highlight the resilience of the Australian economy, this good news was played out against a sombre backdrop as our two largest cities went into lockdown.

The economy was able to weather the storm in the June quarter with gross domestic product (GDP) surprising the market on the upside by growing 0.7 per cent, propelling annual growth to an all-time high of 9.6 percent. The annual rate – the largest increase in Australia’s history – is linked to the rapid recovery in late 2020 following a 7 percent fall in the June quarter last year.

Driven by domestic demand, the GDP results demonstrate that the economy was in a relatively strong position before the lockdowns. Household spending was up as Australians splashed out on clothes and footwear, while expenditure on furnishings such as home office equipment also increased.

As a result, Australia will avoid a technical double-dip recession. The current September quarter, however, is certain to be negative with the two most populous states affected by the Delta variant lockdowns.

The Reserve Bank of Australia forecast that the economy is likely to grow in the December quarter as the current setback is expected to be “only temporary”. 

However, while the RBA will begin winding back its bond-buying program, it has delayed any further stimulus reduction until early next year given the current slowdown.

“GDP is expected to decline materially in the September quarter and the unemployment rate will move higher over coming months,” RBA Governor Philip Lowe said.

“As vaccination rates increase further and restrictions are eased, the economy should bounce back.” The economy is tipped to resume its pre-Delta growth trajectory in the latter half of 2022. 

COVID-19 does, however, remain a wildcard and could still result in further economic disruption and some market uncertainty.