Australia 

Australia’s GDP rose by 1.1% for the year and 0.1% for the quarter to March, with both the annual and quarterly pace slowing from the previous quarter. Inflation was 3.6% for the quarter to March, continuing a slowing trend from 4.1% annually to last quarter, with our inflation peak 3-6 months after the US.  Unemployment rose to 4.0% in May, up from 3.9% the previous month and 3.7% a quarter ago.  Forward looking indicators in Australia are mostly weaker with the Purchasing Manager Indices (PMI) in Australia strengthening for manufacturing but weakening in services over the quarter to June, while both business confidence and consumer confidence were weaker.  Stress from cost-of-living pressures are extending as the relief anticipated from only one RBA rate cut priced by markets later this year. 

United States 

The United States’ GDP rose by 2.9% for the year and 0.33% (1.3% annualised) for the quarter to March, reflecting a slowing GDP from the prior quarter. Headline Inflation was 3.3% in May, reflecting a downwards to sideways range over the past year, with core inflation continuing to trend down to 3.4% and the Fed’s preferred measure Core Personal Consumption Expenditure (PCE) down to 2.75% for the year. Unemployment rose to 4.0% in May, up from 3.9% in April and from the low of 3.4% in April last year. The broader measure of unemployment, the U-6 measure has been trending up from 6.5% in December 2022 to 7.4% in May 2024.  Forward-looking indicators from the PMI indices in June for manufacturing are volatile but gently rising across the last few months indicating a tentative rebound in growth.    

Europe 

The Eurozone GDP picked up over the last quarter from an annual low as growth advanced 0.3% for the quarter and 0.4% for the year to March. Inflation picked up from a recent low of 2.4% to 2.6% in the month of May, a modest bounce after a year of mostly declining inflation since the peak of October 2022.  Unemployment fell to a new multi-year low average for the Eurozone of 6.4% in May.  Forward-looking indicators such as the Eurozone Purchasing Manager (PMI) indices were on a cyclical upswing from the December quarter until the last couple of months, reflecting weaker services and manufacturing. This may be indicative of softer economic growth ahead. 

China 

China’s official GDP rose 1.6% for the quarter and 5.3% for the year to March, stronger for the quarter and year. Inflation remains weak at 0.3% for the year to May, weakening over the quarter and around the same level from a year ago. Unemployment was at a yearly and quarterly low of 5.0% in May after reaching a high for the year of 5.3% in February.  Forward-looking indicators for both manufacturing and services PMIs have continued a gradual uptrend into expansionary territory indicating a slow pickup in growth is likely. Consumer confidence has been oscillating sideways for most of the last year, remaining around lows since falling dramatically in early 2022.  The Chinese central government has persisted with incremental fiscal stimulus over the last year, seeking a path to the government’s 5% GDP target.  

Economic outlook

Inflation continues to fall across the world. The United Kingdom’s inflation has fallen to 2%, one of the lowest rates in advanced economies. Australia’s inflation rate fell to 3.6% in the March quarter but a rise in the less accurate monthly inflation gauge since February may be a guide to a flattening of the quarterly inflation pace. The US inflation figure also fell with core services flat with other items smaller and mixed, with the outlook for further declines possible despite a sideways trend since June last year. The outlook for inflation is broadly lower as supply of goods and labour is outpacing demand, particularly with consumer demand down and a slowing pace of government spending.  We see some components of inflation taking longer to normalise, particularly services and housing cost inflation. 

Economic growth has slowed but is still positive globally, tracking at a sub-trend pace in the US and Australia. We see leading economic indicators guiding to signs of a rebound in global growth but there is less evidence of this for Australia. However, some leading indicators had implied recession which has not come about in the last 12 months despite market participants anticipating recession in late 2023. There are continued signs of a bottoming out process from leading indicators including Purchasing Manager Indices (PMI) for manufacturing and services, and the OECD Leading Economic Indicators showing recovery from lows. This is promising for the trajectory of growth for the year ahead. We are alert to a change in the environment as consumers have drawn down savings and struggled with cost-of-living pressures which could change the outlook to weaker growth. 

Employment has been resilient overall with a normalisation in labour markets. Wage rises have moderated with the supply and demand of labour returning close to balance. The rise in unemployment from lows reflects this rebalancing, however we are conscious that a further weakening in unemployment and wage growth has a negative feedback loop into growth. 

The mix of central bank policy for cash rates and government budgetary spending (fiscal policy) influences each other. While governments globally and particularly in the US and Australia have injected large stimulus into the economy, we are now seeing some slowing and reversal of policy. This has come about to manage down the impact on total government deficits and slow debt growth. The introduction of some new taxes by Australian state governments is being offset by income tax cuts at the Australian federal government level.  Central bank policy makers have had to lean against some of this government stimulus initially by keeping cash rates high, but as we see some reversal and potential cooling of the economy there should be room for cuts to start by the end of the year.  What could upset a desire to cut rates is if there is a resurgence of government spending – likely in the US given it is an election year, and the impact of a higher-than-expected inflation in Australia.  There is a rising probability of one hike in Australia while it is more likely that the US Federal Reserve delays a rate cut if those fiscal and inflationary pressures force the hand of central banks. 

 

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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.