Last updated: October 2024
Economic activity remained broadly weak over the quarter. Q2’24 GDP grew by 0.2% Quarter-on-Quarter (QoQ), bringing the Year-on-Year (YoY) rate to 1.0%, driven by weak household consumption. Business survey responses indicated slowing conditions, with retail facing the most challenges. The labour market has remained broadly strong, although signs of softening emerging with job vacancies declining further over the quarter.
The trimmed mean CPI (the Reserve Bank of Australia (RBA)’s preferred measure of inflation) rose by 0.8% Quarter-on-Quarter (QoQ) in Q2’24, down from 1.0% QoQ in Q1’24, easing concerns about potential accelerating underlying inflation in Australia. More recent inflation indicators have also eased driven by the government's energy rebate for households.
Against this backdrop, the RBA kept interest rates unchanged at 4.35% p.a. over the quarter noting it "remains vigilant to the upside risks to inflation" and pushing back against expectations for an interest rate cut in the coming months.
Economic conditions have remained resilient but regionally divergent over the quarter. The resilience was led by the US. Despite fears of a US recession driven by weakening labour markets and the manufacturing sector, overall conditions remain strong. Q2’24 GDP grew at 3.0% QoQ annualised rate, driven by household consumption, while recent surveys of services companies pointed to solid growth. Conditions were more challenging for the Eurozone, with recent data indicating a softening in conditions, led by German manufacturers. With greater confidence in the inflation outlook, the US Federal Reserve (the Fed) cut interest rates by 0.5% to 4.75-5.00% p.a. Fed chair Powell stressed the size of the cut should not be extrapolated going forward and that future decisions will be data dependent and made on a meeting by meeting basis. Meanwhile other regions including the Eurozone, Sweden, Switzerland, United Kingdom, Canada and New Zealand also cut rates by 0.25% in the September quarter due to reducing inflationary pressures.
In Japan, economic activity improved with Q2’24 GDP rising to 0.7% QoQ with the impact of wage increases becoming evident in consumption readings. The Bank of Japan (BoJ) raised interest rates from 0.1% p.a. to 0.25% p.a. with its governor stating that they will continue to hike rates if the economy continues to evolve with expectations. Meanwhile, conditions remained lacklustre in China driven by ongoing weakness in its property sector, impacting both economic growth and consumer confidence. In response, late in the quarter Chinese policymakers pledged necessary fiscal expenditures to meet this year's economic growth targets and address the decline in the property market and the Peoples’ Bank of China also cut interest rates and reserve ratio requirements.
Australian Shares ended the quarter higher as investor optimism for interest rate cuts internationally grew and Chinese authorities announced policy measures. Australian Government Bonds also produced positive returns, driven by international economic and market developments, despite the RBA pushing back against expectations for near term interest rate cuts. The Australian dollar (AUD) was mixed against major currencies, appreciating against the US Dollar, as investor optimism grew for interest rate cuts while depreciating against the Japanese Yen following the Bank of Japan’s interest rate hike.
International Shares overall continued to produce strong returns. The quarter saw some volatility, with markets initially declining due to fears of a US recession and sharp currency movements before recovering as the Fed began cutting interest rates. Emerging Market Shares also performed well as investor optimism rose following the pledge from Chinese policymakers to stop the decline in their property market.
International Government Bonds rose following weaker US employment and manufacturing data and in anticipation of a US interest rate cut.
We expect high interest rates and cost-of-living pressures to keep household consumption and economic growth suppressed. We continue to expect core inflation to decline albeit at a slower pace compared to other developed economies due to pressures in residential rental markets. Whilst risks remain, we do not believe that the RBA will implement a new series of interest rate hikes given the weak growth backdrop. Rather we believe that interest rates have likely peaked this cycle.
Consequently, we favour Australian government bonds over cash as interest rates are likely to have peaked this cycle.
Despite lingering US recession concerns, we expect a soft landing for the US economy, characterised by slowing but positive growth. We expect inflation in the US to slow further, driven by a decline in services inflation, and expect the Fed to continue to cut rates. However, the market’s expectations for US interest rates cuts appears excessive. We expect China’s growth to improve from its current slow pace, supported by government policies, with favourable policy conditions to also aid growth in other emerging economies.
Broadly, we expect international economic growth to remain resilient but regionally divergent, whilst from an asset class perspective, we continue to favour emerging markets over developed markets due to their better economic prospects and more attractive valuations.
This document is issued by Mercer Investments (Australia) Limited ABN 66 008 612 397 AFSL 244385 (MIAL). MIAL is a wholly owned subsidiary of Mercer (Australia) Pty Ltd ABN 32 005 315 917 (‘Mercer Australia’). References to Mercer shall be construed to include Mercer LLC and/or its associated companies. ‘MERCER’ is a registered trademark of Mercer Australia.
This document contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission.
The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the Fund, asset classes or capital markets discussed.
Information contained herein has been obtained from a range of third party sources, including underlying investment managers. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.
Investors should be aware that the value of an investment in any MIAL product may rise and fall from time to time and that neither MIAL nor Mercer guarantees the investment performance, earnings or return of capital invested in any MIAL product. Past performance does not guarantee future results.
If you are investing in or considering an investment, you should note that the information contained in this document is general in nature only, and does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend. It does not take into account your personal needs and circumstances.
Before deciding whether to acquire, continue to hold or dispose of an investment, you should refer to the Product Disclosure Statement (PDS) and Target Market Determination (TMD) before making a decision and consider seeking independent advice from a professional financial adviser. The Financial Services Guide (FSG) for MIAL can be obtained via mercer.com.au/mercerfunds. Conditions, fees and charges apply to MIAL Fund/s and may change from time to time.
© Copyright 2024 Mercer Investments (Australia) Limited. All rights reserved.