July Economic Update

By Craig Turnbull, Active Super Chief Investment Officer
July 2021

Australian stocks defied gravity over the past year amid some very serious headwinds. The S&P/ASX 200 jumped 24 percent in 2020-21, posting its biggest increase on record, while the All Ordinaries surged 26.4 percent – its best performance in a financial year since 1987.

In a year that was dominated by the recovery from the COVID-19 sell-off, the market turnaround was largely driven by significant gains among the big banks and resource companies which helped the market smash its pre-pandemic levels and strike a record high in May.

This turnaround propelled the performance of many investments, highlighting the strength of super funds and the importance of diversification which spreads risk and can limit financial losses.

The Reserve Bank of Australia told us that the economy was in better shape than had been forecast, but chances of an increase in the official cash rate remains some way off and unlikely before 2024. RBA Governor Philip Lowe said the central bank would keep stimulus in place because both inflation and wage growth remained low. Australia’s inflation rate of around 1.1 percent is well below the RBA target of between 2-3 percent.

Strong labour market

Turning to jobs data, the unemployment rate fell to pre-pandemic levels of 5.1 percent in May for its seventh consecutive monthly decline. The unemployment rate is now back to where it was in February 2020 and looks to be heading lower – well below its pandemic high of 7.5 percent. 

source: ABS

There was further encouraging news on the labour front as ANZ job advertisements improved for the 13th consecutive month in June. The number of ads rose 3 percent to more than 210,000 over the month and are up almost 40 percent on early-2020 levels.

ANZ economists say the figures are consistent with an official jobless rate of 5 percent.

One reason behind the dramatic fall in the unemployment rate is the border closure which has prevented both skilled and unskilled workers from entering the Australian workforce.

The RBA said the eventual opening of the international border would be positive for the economy as businesses were currently delaying investment due to the lack of skilled workers and even capital equipment.