What is the outlook for the economy and equities as health measures bring the risk of COVID under control? Ausbil’s Executive Chairman, Chief Investment Officer and Head of Equities, Paul Xiradis (PX); and Chief Economist, Jim Chronis (JC) share their views.
Q: How is the Australian economy looking post-lockdown?
JC: Fortunately, given the background of rising and broadening vaccination rates in Australia, Ausbil has held the view that there would be a sustained economic rebound. As we move beyond lockdowns and into living with and managing COVID risk, we see a re-acceleration in the momentum of global growth in the forthcoming December quarter and throughout calendar year 2022. With this in mind, Ausbil is forecasting US economic growth for 2022 at 4.6%-year average, ahead of consensus of 4.2% and well ahead of trend. A strong US will also see global growth of 5.1% (well ahead of the 10-year average of 3.7%), with China slowing to 5.2%, the Eurozone at 4.7% and Japan with growth of 2.8%.
US core PCE inflation continues to overshoot for the near term with a rate hike expected in January 2023. For Australia, our position has been, and remains, for a 2024 rate rise, and following the latest RBA update, earlier if warranted. The timing of such is entirely dependent on the evolution of nominal wage inflation and whether it exceeds the key 3% threshold so as to ensure consistency with core inflation remaining sustainably within the RBA’s 2-3% target range.
Looking through what we see as a saw-tooth pattern in activity for the September and December 2021 quarters, Australia’s GDP growth is expected to resume its well-above trend pace heading into next year, averaging a robust 5.2% in 2022. This is based on our view that pent-up demand, post-lockdown, will fuel a resurgence in household and business spending leading into Christmas, and beyond. This will be stronger than anticipated as consumers and the business sector return to more normal levels of activity, funded from excess savings, and improving corporate sector balance sheets. Moreover, the resources boom will underpin the Australian dollar, firming back to within US75-80 cents, with a further upward bias likely in the latter part of 2022.
The key risk to our outlook will be inflation and how quickly it appears relative to expectations.
Q: Where are we in the inflation cycle? Is it a growing risk?
JC: Ausbil’s view remains that US inflation should moderate as supply constraints and labour shortages correct throughout 2022.
According to the US Federal Reserve, their assessment has shifted to inflation remaining elevated for longer than previously thought. The factors driving the acceleration in inflation to date are supply constraints and bottlenecks rather than a tight labour market, and the reopening of the economy which has contributed to sizable price increases in some sectors. Expectations over 2022 are for an easing of supply constraints, employment growth and a reduction in inflation. As Federal Reserve Governor Quarles stated, ”transitory” does not necessarily mean ”short lived.“ And more importantly, given that the drivers of inflation so far are principally attributable to a small set of factors, then “monetary policy often can look through those types of disruptions to consider what inflation will be in the future when this [COVID] episode passes,” said Quarles.