Westpac Market Outlook March 2023
Our latest thinking on Australia, markets and the global economy.
Read full report 'Westpac Market Outlook March 2023' (PDF 411KB)
Global inflation fears have returned over the last month. The renewed concern centres on signs that global price pressures are taking longer to subside and that economic activity appears to be holding up better than expected. This in turn raises the prospect of both further monetary tightening and tighter settings being maintained for longer. The reaction from financial markets has seen more turbulence, US bond yields pushing higher, the USD firming and equities entering another modest sell-off. Perhaps the simplest measure of how far things have swung is that market pricing is now giving about a 50:50 chance of the FOMC passing a 50bp rate hike at its next meeting later this month. While there is clearly more FOMC tightening to come and a big move is a risk, we remain confident that US inflation will be essentially back at target in the second half of the year, meaning that markets will start back-tracking on these moves from around mid-year.
Closer to home, the last month has seen some notable shifts, the Australian economy posting a soft finish to 2022 with clearer signs of strain emerging across the household sector where rate rises are having a clear impact, and more ‘non-threatening’ reads on wages growth. This has allayed some concerns about domestic-driven price pressures although returning inflation to target remains the primary concern for the RBA, with the bank warning that further monetary tightening can still be expected even though it is more open on the timing and extent of rate moves – with any further moves data dependent. While a pause is an option on the table in coming months we continue to expect two more 25bp increases in April and May before the RBA will be comfortable enough about the inflation situation to leave rates unchanged.
Australia: We continue to expect a sharp economic slowdown in 2023, with growth forecast at a well-below-trend 1%, as high inflation and higher interest rates impact. The softer-than-expected end to 2022 lends support to this view. Domestic demand stalled in the final three months of 2022, including a slowing of quarterly consumer spending from 1% to 0.3%. Household income flows are under intense pressure from rising interest payments, an increase in taxes payable and a reduction in social support payments, as well as high inflation. The sizeable household savings buffer, and a still robust labour market, will cushion the impacts of these pressures. Economic growth is forecast to lift to a still modest 1.5% in 2024 (downgraded from 2.0% previously) supported by an emerging easing of monetary policy.
Commodities: Westpac’s Commodities index fell 5% in February led by a 23% fall in thermal coal prices, while met coal prices fell just 3%, seeing a return of the met coal premia. EU gas prices have halved since the December peak but Australian LNG export prices are less volatile than global spot prices and have fallen by less. Chinese iron ore demand has firmed but input costs are squeezing steel mill margins while OPEC+ pricing power is returning to the crude oil markets.
Global FX markets: The US dollar has rallied over the past month amid greater persistence in inflation and with activity growth resilient. While the peak in the fed funds rate is likely to be higher than previously anticipated, policy will take effect, reining in inflation and suppressing growth. As market participants gain confidence and search for opportunity, capital will flow from the US dollar to Asia.
New Zealand: The Reserve Bank of New Zealand hiked the Official Cash Rate by 50bps in February and continued to talk tough on inflation. As a result, we have revised up our forecast for the peak in the cash rate to 5.50%. As the full impact of high inflation and interest rate hikes over the past 18 months ripples through the economy, we expect a sharp downturn in domestic demand over the course of this year, with a related rise in unemployment.
United States: In the past month, the US has shown resilience, but also fresh evidence of persistence in price pressures. Our medium-term expectations remain unchanged, but current circumstances require the FOMC to do more to mid-year to quell inflation risks. While not on the mind of the market, the most significant risk for the US is getting stuck in a low-growth rut.
China: Over the past year, the US has sought to restrict China’s growth in industry related to the green transition. While US authorities can certainly alter their citizens preferences for Chinese goods, and perhaps the appetite of some other developed nations, China’s dominance in many of these burgeoning areas of growth is unassailable, particularly given the scale of developing world demand.
Europe: Benefiting from the global easing in supply issues, the policy focus has quickly shifted to domestic drivers of inflation. Having been the key economic support for the past year, strength in labour market outcomes now represents the key near-term risk to inflation. With slack yet to emerge, the ECB will maintain their hawkish resolve upon delivering another 50bp rate hike next week.
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