Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Is Australia poised to outperform the US economy?
Australia has thus far remained relatively immune from the inflation challenge occurring around the world, but the 5.1 per cent CPI result in May was met with significant concern from the central bank. While the majority was explicable, being rolling impacts on energy, education and property costs from the pandemic, the Reserve Bank has responded in the same way as most of its global counterparts.
After suggesting rates were unlikely to be increased until 2023, the RBA hiked rates twice during the quarter to 0.85 per cent, which has sent the bond yield above 4 per cent, well ahead of even the US. This has had an immediate impact on the property market as borrowing becomes more expensive and also hits consumer sentiment hard.
The challenge facing the economy is obvious, with the rate of GDP growth slowing in the first quarter to 0.8 per cent as commodity exports weakened due to lockdowns in China. Australia continues to benefit from the energy crisis due to our vast resources in minerals, gas and grain, with the Queensland government responding by adding an opportunistic royalty lift to the coal mining sector. That said, lack of staff remains a major issue for the country, which has been quite self-sufficient in 2022.
Recent wage increases are no doubt needed but have come with warnings that embedding such growth into the economy, which is not reversed when inflation falls, could lead to higher inflation without productivity gains. Tourism remains challenging, however signs of an end to lockdowns and strict policy in China look to be our saving grace.
Outlook: The big question is how far the central bank will go and what impact the “wealth effect” will have on the consumer spending that drives the economy? It looks likely rate hikes will not be as aggressive as currently priced-in and Australia’s commodity sector will win again.
United States
The US economy suffered an unexpected contraction in the first quarter, shrinking 1.5 per cent as imports surged following a year of supply-chain issues. Consumer spending remained strong but there were growing signs of stress, as sentiment has fallen to 2020 levels.
Inflation remains the primary and present danger, with the rate of increase in prices hitting 8.6 per cent in May after slowing in April. While the causes are clear, being fuel and housing costs, it has now begun to spread into other parts of the economy including meat, fish and eggs. On a positive note, the more relevant PCE (personal consumption expenditure) measure slowing to 6 per cent; research was released suggesting less than half of current inflation was being driven by demand-side factors.
Regardless of this data, the Federal Reserve is on an aggressive hiking path, following a 50-basis point hike with 75 basis points, taking the cash rate to 1.75 per cent. The US central bank is seeking to reduce demand to offset supply issues via the blunt instrument of interest rates, with many now predicting the Fed could move beyond 4 per cent.
The key challenge it faces is engineering a soft landing of the economy in which growth slows but does not turn negative, while also having little impact on unemployment given the gains achieved. This will be near impossible to achieve with Manufacturing and Service PMIs (purchasing managers’ index) both beginning to contract and the ten-year bond market having seemingly peaked at close to 4 per cent before falling to 3.5 per cent.
Outlook: The US faces the biggest challenge in decades, as it seeks to reverse supply-side inflation by cutting demand, following decades of attempting to stoke inflation unsuccessfully. The risk of recession is real, as is the threat of a spike in unemployment occurring at the same time that the cost of living has rarely been higher for Americans.
