Economic Update Dec 2023

We got a pause on interest rate rises with the meeting in December and a change in language as well, with Michelle mentioning “whether further tightening is required…”

This notion that we might be through the rate tightening cycle saw a small fall in long duration bond yields (10 year bonds) with them now sitting at 4.1%

The US bond market fell further than the Aussie which helped prop up our exchange rate with the Aussie dollar moving from $0.63 to $0.67.

Australian economy underperforming: The Australian economy remains in an underperformance stage of the business cycle, with growth below trend and per capita GDP negative³⁴. This is attributed to weaker global growth, the lagged effects of tighter monetary policy, and fiscal drag from tax payments. There are still a lot of challenges to earnings growth, margin compression, and inflation pressures from a high migration intake. We expect the RBA to be less aggressive in normalizing the cash rate over 2024 and 2025⁵.

Unemployment remains tight with Australia moving from 3.8% to 3.9%, the US potentially headed for a similar position with Job Openings falling rapidly and will be soon at balance with unemployment.

Property and infrastructure sectors benefit: Lower interest-rate expectations have been positive for the property and infrastructure sectors, both in Australia and internationally⁶. Transaction volumes have been low as investors and financiers weighed a higher interest-rate environment and structural changes in demand and supply⁷. We expect pricing to adjust to a more realistic equilibrium and transactions to pick up in the second half of 2024. There are still a lot of opportunities and challenges from climate change and the low-carbon transition for infrastructure assets.

International equities rally: International equities have rallied strongly in November and December, following weakness in previous months⁸. Due to the factors of declining interest rates, slowing inflation, easing oil prices, and reduced geopolitical tensions. The U.S. Fed has endorsed market expectations of policy easing in 2024, and that other central banks are expected to follow suit. The consensus is for a soft landing for the global economy, despite some pockets of weakness and uncertainty⁹. We expect a stronger focus on valuations and business fundamentals in 2024¹⁰.