At this time, we are facing significant instability, both on a domestic and global level. But how serious will the impact of this be on our economic recovery; and how can finance leaders prepare their businesses to stay ahead of the challenges?
For the first large Moir Group event of the year, we were delighted to be joined, once again, by Shane Oliver, Head of Investment Strategy and Chief Economist at AMP. Shane shared with us an insightful commentary on the current situation and answered a range of questions from our event attendees.
Issues have intensified compared with 2-3 years ago and have become increasingly complex. Whilst Shane generally takes an optimistic stance on the economic outlook (based on previous experience), he confessed to feeling more apprehensive at this time based on the sheer number of threats we are currently facing.
Despite this uncertainty though, he believes that economic growth and recovery is still on track for Australia in the long-term. Whilst we are expecting a slow-down of growth this quarter due to instability from COVID and the war in Ukraine, we have, as a nation, seen less of a hit to our share prices compared to US and Europe. And whilst fuel prices are now impacting households, we are also bolstered by our status as exporters of net energy and commodities, the prices of which have received a boost following the war in Ukraine.
Overall economic and investment outlook
- The major threats: the war in Ukraine; energy prices; supply constraints and inflation; wages growth; China issues; US mid-terms; the Australian Federal election in May
- Expect ongoing economic recovery driven by stimulus, vaccines and reopening – albeit with bumps along the way including from the war in Ukraine which is now the biggest threat
- Australian economic growth will slow in March from the Omicron disruption, supply issues, floods & higher petrol prices, but Omicron cases have peaked, booster rollout and excess household savings growth mean stronger growth to resume through the year
- The spike in inflation is mainly due to pandemic driven distortions to demand and supply chains but the risks are of higher inflation over the next decade
- War in Ukraine imparts a stagflationary shock
- Expect the first Fed hike in March and the first RBA rate hike in June
- Shares are likely to remain highly volatile this year, but likely to provide good returns on a 6-12 month view helped by rising earnings on the back of economic recovery
- US mid-terms also causing volatility in the shares market.
Q&A’s from the session
Q: What is the impact of the recent flooding on growth?
A: A lot of people have been hard-hit by these floods, some for the second year in a row. However, when you look back at the history of these things- for instance back in 2011 when a lot of the country was underwater- At that time, the hit to GDP in the March quarter of 2011 was only -0.3%. This time around, we will likely see a hit at the end of this quarter, but the rebuilding effort will get underway and the overall impact won’t be felt as strongly.
Q: What are your thoughts on the Australian dollar for the year ahead?
A: In a world of higher commodity prices, the Australian dollar is likely to increase in the next 12 months. When bad things happen globally, the dollar tends to go down, but, since the war in Ukraine, it’s actually gone up. We are seeing record trade surpluses in Australia and they’re only going to get bigger as a result of the war putting upward pressure on commodity prices.
Q: Where we’re reliant on the global supply chain, how can we ensure we’re receiving products as normal? Will we forever be behind the queue of the larger Northern Hemisphere markets?
I don’t think we’re behind in the queue. We have a manufacturing powerhouse just to the north of us in Asia. As issues with China arise, we will see more production shifting to Vietnam and Southeast Asia. There could be temporary disruptions, but I don’t think they will be terminal for Australia.
Q: Will the household savings rates provide a buffer to the impact of rising interest rates?
A lot of households in Australia got ahead with their interest payments and debt servicing payments and therefore they have a bit of a buffer there. There are $250bn in excess savings that occurred over the last 2 years that wouldn’t have normally occurred, and the RBA estimated that 40% of households are ahead of their debt payments, as a result of the pandemic.
Q: Do you see potential changes with regards to climate change policy after the election as an opportunity or a threat?
I think it’s a huge opportunity in Australia. We’re at the forefront with solar panels and we have a massive array of natural energy sources that we can better tap. Yes, it will be painful for coal producing areas, but a lot of other areas are going to benefit. Providing that we, as a nation, help and compensate people whose livelihoods are in coal to adjust, then I think we can move forward. I personally think, the sooner we move, the more we can get ahead.
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