Economic Update

By Craig Turnbull, Active Super Chief Investment Officer
August 2022

The Australian share market has rebounded in recent weeks, hitting two-month highs amid a mixed economic report card and a further hike in interest rates.

Higher petrol and food prices, along with increasing home building costs, drove Australia’s annual inflation rate to a two-decade peak while the federal government forecast a deterioration in the cost of living towards 8 percent and a slowing economy.

Australia’s annual inflation jumped 6.1 percent, taking it to its highest level in more than 20 years while underlying inflation – the central bank’s preferred measure – rose 1.5 percent in the June quarter and 4.9 percent for the year.

Apart from the introduction of the GST in 2001, annual growth in headline and underlying inflation was the fastest since the early 1990s. 

In an attempt to ease inflationary pressures, the Reserve Bank of Australia (RBA) raised interest rates by 0.5 of a percentage point for the third consecutive month in August, taking the official cash rate to 1.85 percent. The RBA also downgraded the pace of economic growth in 2022 to 3.35 percent from 4.20 percent forecast in May.

Treasurer Jim Chalmers said the consumer price index was tipped to hit 7.75 percent in December before easing to 5.5 per cent at the end of the 2022-23 financial year. The government also downgraded economic growth by 0.5 percent for the current financial year and 2023-24, partly due to rising  interest rates.

Shares rebound

The S&P/ASX 200 has made up some lost ground since the start of the current financial year, rising around 5 percent in the past month after three consecutive months of declines. The market has been driven by strong gains in recent weeks by a number of sectors such as information technology, real estate, financials, consumer discretionary and health care. Despite this improvement, the benchmark index remains almost 7 percent lower over the course of 2022.

US economy shrinks

In the US, the economy unofficially fell into recession after it shrank for two consecutive quarters while annual inflation in June struck a 41-year-high of 9.1 percent, driven by an increase in the cost of energy, food and rent. The annual July CPI figure moderated slightly to 8.5 percent. Last month, the Federal Reserve hiked interest rates by 0.75 percentage points for the second consecutive month. The European Union, UK, Canada and New Zealand are among some of the other countries that have also been lifting interest rates.

By raising interest rates, central banks make it more expensive for consumers and business to borrow money for loans, often forcing them to reduce spending elsewhere. By spending less, the economy cools and inflationary pressures ease.

US gross domestic product (GDP) fell at an annualised rate of 0.9 percent in the second quarter, following a 1.6 percent decline in the first three months of the year. While two quarters of negative growth are usually defined as a recession, US authorities and economists say that is not the case, primarily because of the strong labour market and low unemployment rate. Technically, an official recession has to be declared by the US National Bureau of Economic Research. 

Regardless, a downturn in the US economy would have consequences for Australia as well as the rest of the world.

Tight labour market

On a positive note, unemployment in Australia fell to a new 48-year low of 3.5 percent – its lowest since August 1974 when the jobless rate was 2.7 percent. However, the latest government forecast is for unemployment to tick up to 3.75 percent by next June and 4 percent in mid-2024. The RBA warned that higher inflation and weaker economic growth due to higher interest rates will likely result in an increase in the jobless rate.



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