Westpac Market Outlook June 2023
Our latest thinking on Australia, markets and the global economy.
Read full report 'Westpac Market Outlook June 2023' (PDF 424KB)
The much-anticipated peak in the interest rate tightening cycle remains frustratingly elusive. While headline inflation measures are now well off their 2022 highs, the pace of cooling has tended to disappoint. Underlying measures show a more modest slowing, to paces that are still well above central bank targets. With inflationary pressures particularly persistent in the services sector, and labour markets generally still very tight, the concern is that the monetary tightening to date may still not be enough to ensure a timely return to stable low inflation. Adding to this, the contractionary effects of tight policy have been somewhat milder than expected. The mix saw the FOMC’s June meeting deliver a ‘skip’ rather than what had been widely expected to be a longer lasting ‘pause’ – with a clear signal that a further tightening would be delivered in July. Other central banks are also set to deliver additional hikes, including the RBA, which we now expect to make two more 25bp rate rises in July and August. With each increase, we move closer to tipping real economies into a more pronounced period of weakness. Where policy is now clearly very tight, as it is in the US, we are also starting to get concerned about how a bigger hit may affect capacity and inflation over the medium to longer term.
The situation remains very different in China, with inflation benign and the challenges more around guiding growth through a minor soft patch – something deft policy support aimed at shoring-up confidence should be well-equipped to manage.
For markets, the general view is still that the global interest rate cycle will peak by year-end, and start to move lower in 2024. However, the duration and extent of further tightening has again been pushed out, the scale of any cuts next year also being questioned. For currencies, relative growth prospects are expected to drive shifts amongst the big ‘safe haven’ currencies but will do little to help the AUD which also looks to be suffering from its ‘low-yielder’ status.
Australia: We have lowered our growth forecasts for 2023 and 2024 to reflect a higher terminal RBA cash rate of 4.6% and a delay to the first rate cut in 2024, from February to May. The key driver of this insipid growth outlook continues to be households, consumption now expected to grow by just 0.3% in 2023 and 0.6% in 2024. Despite some offsetting positives and pockets of strength limiting the downside to business investment, the weaker outlook for growth overall sees a higher forecast peak in the unemployment rate, of 5.3% by late 2024, with a clear risk of a ‘technical recession’ along the way.
Commodities: Australia’s commodity export prices are down almost 18% in the year to June with thermal coal halving, gold the only commodity to gain in price. Iron ore has held around US$100/t due to recent strength in demand but this appears to be peaking and supply is starting to lift. Coal fell on a correction in EU demand, rising inventories and falling gas prices. It remains vulnerable with lack-lustre demand outside of India. However, crude prices look to have found a base with OPEC+ announcing production cuts and US crude producers seeing little incentive to hedge.
Global FX markets: The US dollar kept to its tested range this month as risks swirled and data failed to provide a definitive signal on the outlook for growth and inflation. However, in our view, it is slowly becoming clear that Europe has stronger prospects than the US. Asia’s foundations for growth are strong and its runway long but markets will be slow to recognise this.
New Zealand: While the Reserve Bank of New Zealand delivered the expected increase in the Official Cash Rate at its May meeting, the central bank’s assessment of economic conditions was more dovish than we expected and consistent with interest rates remaining on hold from here. We continue to expect that higher interest rates will be required, but have revised down our forecast for the peak in the cash rate to 5.75% (from 6.00% previously) while pushing out the time when rate cuts might occur.
United States: The FOMC has a significant dilemma to deal with. While contractionary policy is necessary in the short-term to eradicate inflation risks, if held on to for too long, restrictive policy will suppress investment and could produce a structural imbalance between demand and supply. Doing so would materially increase the probability of a sustained period of stagnation.
China: Market participants have become despondent over China’s prospects following two soft rounds of activity data over April and May. In our view, these results question confidence amongst households and business, but not the underlying growth capacity of the economy. With authorities now positioning to provide active support, the perceived outlook is set to brighten.
Europe: The ECB opted to raise rates by 25bps as underlying inflation proves stickier than previously thought. Further rate hikes are to be expected in July and September following President Lagarde’s hawkish comments. The Bank of England is expected raise the bank rate by 25bps as strong inflation pressures persist and strong wages growth prompt action.
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