Westpac Market Outlook March 2024
Our latest thinking on Australia, markets and the global economy.
Read full report 'Westpac Market Outlook March 2024' (PDF 426KB)
Markets have remained in a holding pattern over the last month, the focus on exactly when major central banks may start to lower interest rates. Most money still favours the US FOMC leading off with cuts from mid–year, the ECB and other majors following a little later (the Bank of Japan an important exception), and the RBA towards the end of the third quarter. This is broadly in line with the Westpac view. However, mid–2024 is now barely three months away. And for markets, there is a growing tension between these policy expectations and both economic developments and central bank rhetoric, which has tended to move more slowly in the direction of easing.
In the US, inflation is closer to being back under control – most FOMC members expect key measures to be around 2.5%yr by year end, almost back to the 2% target – but the growth story has yet to show a decisive turn. US GDP growth is still above 3%yr, with the closely–watched nonfarm payrolls continuing to defy expectations of a softening (although, as we highlight in the month’s report, a wide range of other measures suggest conditions are much weaker). In most other jurisdictions, including Australia, the growth piece has more clearly rolled over but inflation has yet to provide enough comfort for central banks to openly contemplate a policy pivot. Lurking behind this question about the timing of the first rate cut are much bigger and more difficult questions about the size of the easing cycle and where ‘neutral’ may now lie. Indeed, the sort of uncertainty we are seeing now may be a recurring theme in the next policy phase.
Australia: It was a soft end to the 2023 year as domestic demand all but stalled in the December quarter, representing a marked deceleration from the first half of the year. This was as expected. Much of 2023’s weakness stemmed from the household sector. Household incomes have been squeezed by high inflation, a larger tax take and higher interest rates. Soft economic conditions are set to continue over the first half of 2024, with output growth expected to be around a 1.3% annualised pace over this period. However, there is light at the end of the tunnel. Inflation is moderating, which will help to lessen the pressure on households. Policy is set to pivot from mid–year, with the Stage 3 income tax cuts commencing from 1 July and the beginning of an RBA easing cycle, expected from September. Less restrictive policy will support an economic revival. We continue to expect economic growth to lift to around a trend pace in 2025, of 2.5%, up from 1.6% growth for 2024.
Commodities: Commodity prices moved lower through February led by a 10% fall in iron ore and a 4% fall in met coal but thermal coal had a solid 14% rally while nickel bounced 12%. Nickel has always been a boom–bust commodity with a memorable market collapse in 2007 associated with the emergence of Indonesian supplies. Nickel was seen as a critical mineral for the transition to a low carbon economy via its use in batteries but in 2024 surging Indonesian supplies have, again, burst a nickel boom.
Global FX markets: The US dollar is testing the lower end of the 2023–24 range thanks to growing confidence that rate cuts will be delivered this year. The timing and scale of each rate cut cycle is likely to be quite similar but the growth outlook for each economy is not. Of particular note, Euro Area growth is expected to rally back above trend in 2025 as US growth slips below. Conditions are also likely to be mixed in Asia, with enduring strength in China, India and Indonesia, but soft momentum in Japan.
New Zealand: The RBNZ left the OCR at 5.5% last month and expressed greater comfort with the inflation outlook. While risks are viewed as more balanced than in November, the policy reaction remains asymmetric given that inflation remains well above target. This message was consistent with our forecast that while the OCR has likely peaked for this cycle, policy easing is unlikely until 2025.
United States: For most market participants, nonfarm payrolls is the benchmark indicator of US labour market health. But the other detail from nonfarm payrolls establishment survey and the household survey are telling a very different story. In particular, the decline in the number of people employed according to the household survey is in stark contrast to the consistent strength of job creation according to nonfarm payrolls. What’s more, the storied ISM surveys actually point to downside risks to the household survey results.
China: The 2024 National People’s Congress met expectations with respect to key policy actions but disappointed in terms of sentiment – market participants clearly hopeful the new year would bring a more aggressive policy style. As was the case throughout 2023, the market and Chinese authorities have very different perspectives on the economy’s current health and the long–term path to prosperity, with authorities still confident that trade and non–housing investment will deliver the best dividends.
Asia: The ‘shunto’ spring wage decision will be a reflection of cyclical factors rather than a sustained structural shift. These include still–high inflation and strong demand in the services sector – both of which are expected to dissipate. Despite arguments for stronger 2024 wage growth based on rising profitability, structural factors such as low job mobility and seniority–based wages are expected to hinder sustained growth. Overall, the Bank of Japan will have little reason to consider contractionary action.
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