April economic update

By Craig Turnbull, Active Super Chief Investment Officer
April 2022

The Australian stock market has staged a recovery, not only from the initial sell-off following Russia’s invasion of Ukraine, but also from the downturn at the start of the year.

Fears of inflation, supply chain disruptions, higher interest rates, a new Omicron variant and a possible recession have been put to one side for now as the focus turns to the strength of the economy.

A strong labour market with unemployment now sitting at 4 percent, solid earnings from corporate Australia, a rise in US stock markets and a federal budget that didn’t spook the electorate have all contributed to the improved sentiment.

Optimistic outlook

The S&P/ASX 200, up around 5 per cent in the past month, has also been underpinned by strong commodity prices that have risen sharply due to a global energy crunch following sanctions on Russia.

Investors appear to have grown comfortable with the idea of higher interest rates as US markets have posted modest gains since mid-March when the US Federal Reserve raised interest rates for the first time since 2018.

Locally, the Reserve Bank of Australia gave is strongest indication that interest rates are heading higher with some market economists predicting a rate rise from the current record low of 0.1 percent as soon as June.

“Over coming months, important additional evidence will be available to the board on both inflation and the evolution of labour costs,” RBA governor Philip Lowe said. Any rate rise would be the first in Australia since November 2010.

While rising interest rates tend to be a sign of a healthy economy, they do impact corporate profitability as the cost to service loans grows which can dampen share prices of listed companies.

Budget highlights

The March federal budget was an added source of optimism as the government forecast stronger economic growth of 3.5 percent in 2022-23, an upwards revision from a year ago.

Unemployment, already at its lowest level since 1974, is tipped to fall further by the government to 3.75 percent – well below the 5.5 percent forecast last year.

Strong employment rates, resulting in lower welfare payments and higher revenues from commodity prices, have led to a $121 billion improvement in the net deficit, now forecast to be $714.9 billion in 2022-23.

The market will pay close attention to the wage price index and March quarter inflation figures due at the end of April as these will determine the size and frequency of any future RBA interest rate rises.