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Business conditions strong in Australia and US, weaker in Europe and UK

Shane Oliver
29 March 2022

Economic activity trackers

Our Australian Economic Activity Tracker bounced back from its brief flood-related dip and is now at a new high suggesting the economy continues to grow at a solid pace. Our US Economic Activity Tracker rose as did our European Tracker suggesting surprisingly little impact from the war despite a hit to consumer confidence from higher energy prices.

Based on weekly data for eg job ads, restaurant bookings, confidence, mobility, credit & debit card transactions, retail foot traffic, hotel bookings. Source: AMP
Based on weekly data for eg job ads, restaurant bookings, confidence, mobility, credit & debit card transactions, retail foot traffic, hotel bookings. Source: AMP

Major global economic events and implications

Consistent with our Economic Activity Trackers, business conditions PMIs for March were resilient. They fell slightly in Europe and the UK but remain strong and they rose in the US, Australia and Japan. While the war in Ukraine is a threat, so far economic conditions remain strong.

Source: Bloomberg, AMP
Source: Bloomberg, AMP

Unfortunately, while order backlogs for manufacturers are continuing to fall, input and output price pressures remain very high.

Source: Bloomberg, AMP
Source: Bloomberg, AMP

Apart from the continuing strength in US business conditions PMIs, jobless claims fell to a new post-1969 low and underlying capital goods orders fell slightly but along with shipments remain in a solidly rising trend in February. Against this, new home sales fell. The US housing market like that in Australia remains vulnerable to deteriorating affordability and rising mortgage rates although low levels of listings remain a source of support.

Eurozone consumer confidence fell sharply in March reflecting the impact of the war particularly via higher energy prices.

UK inflation again rose more than expected in February to 6.2%yoy, with core inflation at 5.2%yoy, maintaining pressure on the Bank of England.

Australian economic events and implications

There wasn’t a lot of Australian economic data released in the past week, but it was mixed with business conditions PMIs up suggesting that businesses are happy but the weekly ANZ/Roy Morgan consumer confidence index fell to its lowest level since 2020 suggesting consumers are not so happy with the rise in petrol prices and talk of rate hikes. The PMI input and output price measures showed an ongoing acceleration pointing to ongoing inflationary pressures.

Outlook for investment markets

Shares are likely to see continued volatility as the Ukraine crisis continues to unfold and inflation, monetary tightening, the US mid-term elections and geopolitical tensions with China and maybe Iran impact. However, we see shares providing upper single-digit returns on a 6-12 month horizon as global recovery continues, profit growth slows but remains solid and interest rates rise but not to onerous levels.

Unlisted commercial property may see some weakness in retail and office returns, but industrial property is likely to be strong. Unlisted infrastructure is expected to see solid returns.

Australian home price gains are likely to slow further with prices falling later in the year as poor affordability, rising mortgage rates, reduced home buyer incentives and rising listings impact. Expect a 10-15% top to bottom fall in prices from later this year into 2023-24 but large variation between regions. Sydney and Melbourne prices may have already peaked.

Cash and bank deposits are likely to provide poor returns, given the ultra-low cash rate of just 0.1% at present but rising through the second half of the year.

Although the AUD could fall back a bit in the near term in response to the uncertain outlook, a rising trend is likely over the next 12 months helped by strong commodity prices, probably taking it to about $US0.80.


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