March Quarter World Economies Update

Financial Advice

04-04-2024

March Quarter World Economies Update

Australia 

Australia’s GDP rose by 1.5% for the year and 0.2% for the quarter to December, with both the annual and quarterly pace slowing from the previous quarter. Inflation was 4.1% for the 2023 calendar year , continuing a slowing trend from 5.4% annually to last quarter, with our inflation peak 3-6 months after the US.  Unemployment declined to 3.7% in February, down from 4.1% the previous month and 3.9% a quarter ago.  Forward looking indicators in Australia are mixed with the Purchasing Manager Indices (PMI) in Australia weakening in manufacturing but strengthening in services, while both business confidence and consumer confidence have improved from lows but are still relatively weak.  While cost of living pressures are still high in consumer’s minds, there is some relief anticipated with the RBA likely to cut the cash policy rate in the months ahead, albeit Australia lags the recovery seen so far in the US.   

United States 

The United States’ GDP rose by 3.1% for the year to December and 0.85% (3.4% annualized) for the quarter, which was the fourth quarter of rising annual GDP. Headline Inflation was 3.2% in February, continuing a downward but bumpy trend over the past year, with core inflation trending down to 3.8% and the Fed’s preferred measure Core Personal Consumption Expenditure (PCE) down to 2.8% for the year. .  Unemployment was up to 3.73% in December, up marginally from 3.70% in September however the broader measure of unemployment, the U-6 measure has been trending up from 6.5% in December 2022 to 7.3% in February 2024 reflecting a rebalancing of the labour market as the job quits rate declines and wage pressures abate.   

Forward-looking indicators from the PMI indices in March for manufacturing are rising more consistently now with rises over the last three months and meaningfully higher above the December 2022 low.   Services have maintained expansion albeit slightly lower over the last two months.  Small business optimism weakened over the last couple of months, although it is not trending down and is still within the range of the last 18 months , while consumer confidence was weaker but within the range of the last 18 months as well.  Overall US GDP growth is improving while inflation continues to fall, and the labour market rebalances, is a good place for the economy to be, although this is yet to show up in consumer confidence numbers. Optimism for a recovery with no recession builds as does the government spending support and likely rate cuts coming later this year from the Federal Reserve.   

Europe 

The Eurozone GDP weakened with the annual pace falling to 0% for the year and quarter to December, continuing a downtrend from an annual growth peak of 5.1% in Q1 2022.  Longer term the Euro area GDP growth averaged 1.6% from 1995 to 2023. Inflation continued along the declining trend and flattened to 2.6% annual pace to February while the Core CPI measure continued to fall to 3.1%, with both measures well past their respective peaks of October 2022 and March 2023.  Unemployment fell to a new multi-year low average for the Eurozone of 6.4% in January, reflecting the average of countries where unemployment is 3.1% in Germany and 11.6% in Spain.  Forward-looking indicators from the EU PMI indices continue to rise from lows reflecting strong services while manufacturing is lagging.  Consumer confidence continues to improve.  Confidence in business sectors is at a low ebb across manufacturing, with services and construction all low and trending sideways for the last six months.  Europe shows some early signs of improvement through the PMI indices while GDP remains low and inflation continues to decline with the labour market improving. 

China 

China’s official GDP rose 1.0% for the quarter and 5.2% for the year to December, weaker for the quarter but stronger for the year.  Inflation remains weak at 0.7% for the year to February, albeit strongly up from an annual low of -0.8% the prior month. Unemployment was at 5.3% in February, up from 5.0% a quarter ago.  Forward-looking indicators for both manufacturing and services PMIs picked up in March with an improving trend in the last quarter.  Consumer confidence has been gradually improving off recent lows for the year to February.  The Chinese central government has increased the pace of fiscal stimulus this year following their stated 5% GDP target announced at the National People’s Congress.  Previous stimulus efforts in 2023 did not appear to be sufficient to have effect.  Despite the headwinds of the consumer, the increased government stimulus may finally be gaining traction in the economy.  

Economic outlook 

The overall economic outlook is improving with the US leading a recovery and other economies likely to follow from lows in GDP. What are initially tentative signs of bottoming in growth and an improving inflation picture supported by forward looking PMI data, we also see China finally getting traction with their government stimulus measures.  While we aren’t quite out of the woods from recession risk, it is abating and a new business cycle upswing is starting to become apparent across the world. 

A seasonally strong US election year should be supportive for investment markets along with continued government spending support, albeit down from last year. The US has reserves of cash that can be spent from the US Treasury General Account and other sources albeit it is running even higher fiscal deficits to do so.  What was a ‘soft landing’, (ie. A slowing but not negative growth), appears to be evolving towards a ‘no landing’ (that is no further decline in GDP growth) which is very positive for markets.  However, this will defer some of the need to cut policy rates in the US, with markets now pricing in fewer rate cuts this year and pushing out the first cuts. Australia is likely to lag on cash rate cuts from the RBA given our inflation normalization is behind the US by 3-6 months.  However, Australia has a much better government debt and budget balance position which is supported by windfall royalties from persistently higher mining export prices.  Our base case continues to be that a recession will be avoided, with recession probabilities declining and more positive scenarios of growth rising for the US and Australia. Other economies, particularly the recovery in China, appear to be underway and sentiment is improving given the rolling back of wine tariffs, benefiting Australian exporters. 

We view that the business cycle appears to have bottomed in most countries including Australia, and there is room for further expansion.  While markets have factored some of this improvement already, there is still room to grow.  Risks to our view include geopolitical disruptions to trade and energy flows, incurring higher costs and some temporary resurgence in inflation.   This will cause a reassessment by markets which could be quite disruptive. While factoring this as a risk, we assign a probability to that and remain vigilant to adjust the portfolio positions should they increase in likelihood.  Higher government debt loads and gradual currency debasement is also a longer term risk, which we mitigate by seeking some exposure to real assets and businesses that can pass on inflation. 

 

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.