December Economic update

By Craig Turnbull, Active Super Chief Investment Officer
December 2023

The past 12 months have been eventful with global and domestic issues buffeting the Australian sharemarket. There were sharp falls throughout 2023 due to geopolitical conflict and some banking system instability in the US and Europe. 

However, some optimism about the future of interest rates have helped buoy the S&P /ASX 200 in recent weeks.

The local stock market is close to where it started the year, up around 4 percent, in sharp contrast with the US where the S&P 500 has gained close to 20 percent and the Nasdaq about 38 percent.  Investors are predicting that the US Federal Reserve has finished its aggressive round of rate hikes and expect US rates to be cut in 2024.

Persistent inflation

Due to persistent high inflation, Michele Bullock, the new governor of the Reserve Bank of Australia (RBA), had to deliver the 13th interest rate rise in this cycle in November and the first increase since June. 

Ms Bullock said while supply chain issues had initially pushed up inflation, local demand factors had now become the driver of higher consumer prices.

Australia’s inflation rate rose by 1.2 percent in the September quarter, driven by surging petrol prices and rents. While annual inflation slowed to 5.4 percent from 6 percent, price pressures remain well above the RBA’s 2 to 3 percent target range, prompting the latest hike in the cash rate to 4.35 percent – its highest level since 2011. 

Ms Bullock said reining in inflation within a reasonable timeframe remained a priority for the RBA. “High inflation makes life difficult for everyone and damages the functioning of the economy,” she said. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Developments in the Middle East also makes the economic outlook uncertain with lower global and domestic economic growth a possibility.

Economic data

Economic growth slowed in the September quarter as higher interest rates eroded household spending. Australia’s gross domestic product grew 0.2 percent in the third quarter from 0.4 percent in the second quarter, giving an annual growth rate of 2.1 percent in line with the previous quarter.

Australia’s employment sector remains buoyant with the jobless data for October coming in at 3.7 percent. Since June 2022, the unemployment rate has been within a range of 3.4 percent to 3.7 percent. 

"The recent slowdown in the growth of hours worked may suggest that the labour market is starting to slow, following a particularly strong period of growth," according to the Australian Bureau of Statistics. 

For now, the market is anticipating the possibility of an Australian interest rate rise some time in the new year, even with inflation and the interest rate outlook moderating. The RBA will reconvene in February after the summer break, but it will be looking for further evidence of a slowdown in inflation.