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Westpac Market Outlook December 2023 & January 2024

Our latest thinking on Australia, markets and the global economy.

Read full report 'Westpac Market Outlook December 2023 & January 2024' (PDF 438KB)


After a few false summits, global interest rates look to have more clearly reached their peaks in the major developed economies. Headline inflation rates have dropped to around 3% in most jurisdictions. With growth slowdowns also looking clearer, markets have swung back to anticipating a pivot to easing monetary policy in 2024, albeit with the timing and scale of interest rate declines varying – an earlier and more rapid descent expected in the US compared to Europe and the UK. Locally, the narrative is taking longer to turn, the RBNZ expected to deliver one last hike early next year and a chance the RBA does the same at its February meeting if the December quarter CPI produces another upside surprise. Growth-wise, economic activity is subdued globally and likely to remain that way in 2024, albeit consistent with ‘soft landings’ rather than recessions and with, in our view, an overly pessimistic take on China’s prospects.

In what now constitutes a long-standing tradition, our final report for 2023 includes a Year in Review article that looks over the key themes and developments. Hopefully, in time, 2023 will be viewed as the year in which we finally saw-off the tail-end of macroeconomic effects from COVID – namely the high inflation that was set off by the collision of lingering supply chain disruptions and a post-pandemic rebound in demand. For now, it’s still a little too early to draw a hard line under the inflation problem, especially in Australia and New Zealand. And it would be naive to expect that achieving a sustained return to low inflation will usher in a period of calm, stable growth. However, if nothing else, it will make life much easier for policy makers navigating the always tricky trade-offs between price stability and growth.

Australia: Inflation is declining while the domestic economy is stuck in the slow lane. Households are bearing the brunt of policy tightening but some relief is in prospect by the end of 2024. Australia’s population surge is peaking and subsiding, which should help ease housing pressures. Both demand for and supply of labour will ease in 2024. For now, the RBA is still assessing incoming data and will respond to any upside risks but it is becoming less likely that they will need to do so. Our rate outlook embeds a ‘soft landing’ scenario that should allow for RBA rate cuts in the second half but market eagerness to price in the turn may see abrupt shifts along the way. Rate differentials are set to tilt in the AUD’s favour.

Commodities: Despite an end of year rally commodity prices are down ~6% in 2023 led by a 60% fall in thermal coal with a 37% fall in LNG, a 14% fall in base metals and an 11% fall in crude oil. Offsetting these declines are a 37% rally in iron ore, a 22% surge in met coal and a 15% gain in gold. As such, we have lifted our end 2024 forecasts for iron ore and met coal.

Global FX markets: As 2023 draws to a close, factors that acted as tailwinds for the US dollar through H2 2021 and 2022 are turning into sizeable headwinds. We see dwindling outperformance for the US economy and the FOMC leading the global rate cutting cycle as likely to result in a further material depreciation in the DXY index through 2024 and 2025 back to a level broadly consistent with its long-run average. This view assumes the US experiences a soft landing, as does the rest of the developed world.

New Zealand: The RBNZ poured ice water over expectations for OCR cuts in 2024 and instead lifted their interest rate forecasts due to increased concern about the demand impact of strong net migration, sticky core inflation and the future fiscal stance. The OCR could be increased at any of the RBNZ meetings next year. Data on core inflation, growth, migration, house prices and the future fiscal stance will be key.

United States: We expect that managing the restrictiveness of policy will prove to be the FOMC’s greatest challenge in 2024. Policy will need to remain somewhat contractionary to suppress lingering inflation risks to end-2025. Without a series of fed fund rate cuts and follow through to term yields though the real stance of policy will instead continue to tighten. If allowed to occur, the probability of cyclical recession or structural stagnation will rise materially.

China: The market remains pessimistic on China’s outlook. Yet authorities’ actions have laid a strong foundation for sustainable robust growth in production targeting Asian economic development and the global green transition. Further, productivity and efficiency gains warrant an expectation of stable or rising profit margins. China’s key risk is not trade or investment but rather consumption.

Asia: The region is yet to fully recover back to its pre-pandemic growth trend but should be better placed to do so in 2024 and 2025. While developed-world demand is likely to remain weak for some time, investment across the region is continuing at pace with a view to developing the capacity required for the green transition. The region’s services sector is also poised to benefit from the restarting of Chinese international tourism. Australia is well positioned to benefit from the region’s growth in 2024 and the decades that follow.

 

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